What are the differences between DEX and CEX?


There’s so many acronyms in cryptocurrency, but you’ll probably be familiar with the two mentioned above. If you aren’t, DEX stands for Decentralised Exchange (which is encompassed within Decentralised Finance), CEX for Centralised exchange. As you may well be aware, depending on when you are reading this, Y5 is soon to have both a DEX and a CEX. The main takeaway points about the differences between these utilities are as follows.

On the Y5 DEX the profile of the user will remain secret, while at the same time giving the user control of the security of their assets. The Y5 DEX is extremely easy to use, but the sticking points surrounding DeFi mean a user must deposit funds to a non-custodial wallet first before they can use the DEX. This can be off-putting to some investors who want an easier to navigate platform.

The Y5 CEX will be much more streamlined, with users being about to add Fiat currencies to their account, swap Fiat for cryptocurrency or stablecoin assets and swap back to Fiat and withdraw to a bank account. The process is being refined to create as frictionless a platform as possible. The private keys to your wallet and security will be handled by Y5 and you’ll have to provide your identity to be a user, but with Y5 slowly ticking the boxes on the path to becoming a fully regulated CEX, this is all part of the process.

UI and UX:

Centralized Exchanges are popular because they are easy to use. Once you have verified your identity (see below), it’s just a case of loading your wallet with your native currency and exchanging it for crypto currency. The whole process can take mere seconds and CEX’s have spent several years refining how to make the process intuitive, smooth and simple. Everything can be done on one platform and once a user picks the platform that they first use, many will stick to that platform forever.

Decentralized Exchanges are often far more complex, involving complicated and expensive fiat on ramping, downloading a DEX wallet, adding tokens to the wallet, working out how to use slippage, and several other tasks that are not as user friendly. Many find the complexity a turn off and once a trade does not complete as planned, it is often considered a waste of time. With that said, the rewards can be bountiful for those who persevere as new tokens and presales continue to launch within DeFi on a daily basis.

KYC or Anonymity?

Centralized Exchanges regularly align themselves with rules and regulations known as KYC (know your customer). This normally involves a process of verifying oneself via photos of official documents (drivers licence / passport) and a selfie, and sometimes proof of address. These details are stored in the CEX servers and are connected to a specific wallet address.

Decentralized Exchanges offer complete anonymity. When you hold crypto currency in a DEX wallet, (MetaMask, Trust Wallet, SafePal, etc) it is impossible to know exactly who that wallet belongs to. This is the basis for Decentralized Finance. Money can be traced, but the end user cannot be identified. Consequently, in order to remove any crypto back to Fiat, you must go through a CEX or payment system, which as stated above, means identifying yourself to whichever platform you choose.

Not your key; not your coins

“Not your key; not your coins”: there are two situations where this motto rings truest:

● The first is during extremely volatile bear markets. Unpredictable markets can cause CEX’s to pause trading, including withdrawals, on some or all of their users' funds. For example, Binance temporarily stopped users withdrawing Bitcoin recently during some extremely volatile market conditions. This is because the CEX has control over all wallets registered on its platform and can pause trading at any time.

● The second is during the aftermath of a hack. When you hold cryptocurrency on a CEX, you are trusting that their security measures are good enough to ensure your money is safe. If your wallet on a CEX gets hacked, there is little recourse to lost funds unless the CEX will cover the losses. For example, the 2020 KuCoin hack resulted in $240m losses, some of which were never able to be recovered.

In order to use a DEX, you must have a non-custodial wallet. With a Decentralized Wallet, the owner is the holder of the private key or seed phrase that gives access to that wallet and gives full control of the funds inside it. However, it does mean that the onus is on the user to ensure that their passwords, seed phrase and private key are all safely stored. Failure to do so can allow others to get hold of this information and load your wallet onto a different device and steal the funds in that wallet; something that is all too familiar in this space.

Security of DEX wallets also extends to ensuring that you do not click on any links that might give access to nefarious parties looking to steal your funds.

We all know someone who has lost funds, from using a fake PinkSale link, or clicking a ‘free tokens’ button. This sends you to a website that, once given permission, will unknowingly give scammers access to your funds. It is extremely important to always be careful and diligent with your crypto decision.

How trading works:

Centralized Exchanges, in short, match a desired buy / sell order using a constantly updated orderbook. There are many options which can be utilised, including limit orders, market orders and the ability to use stop loss to automatically sell at a preset price. CEX’s usually provide liquidity for the tokens that are listed on their platform (this is known as acting as a market maker) and would enable the CEX to make transactions very quickly, a tool that is extremely helpful for experienced traders.

With Decentralized Exchanges it is quite different: trades happen on a peer-to-peer platform (such as PancakeSwap on the BSC networks or Uniswap on the Etherium mainnet). Liquidity is stored on a smart contract which is used to enable buy / sell transactions. As buy’s come in, it adds value to the liquidity pool while as people sell, tokens are removed. This is how the Y5 Wealth Token works with the added addition that 1% of every buy / sell transaction is diverted to the liquidity pool to constantly top it up creating more stability in its trading value.

In Conclusion:

As stated earlier, most crypto investors find their way into the crypto space by initially using a Centralized Exchange due to its ease and popularity. However, the adventurous minds among us have realized that trading on CEX’s is just the tip of the cryptocurrency iceberg. Most of you reading this will be familiar with Decentralised Finance and DEX wallets through your interaction with Y5 Finance. But with Y5 soon to release its long awaited CEX, it is imperative to know the use case and limitations of both types of exchanges so you, as an investor, can make the most well formed decision for your potential investment.

As always, we have mods available 24 hours a day, 7 days a week on all of our socials. You can join our socials by visiting our website and select the platform you wish to contact us on. We look forward to hearing from you!

Recent Posts

See All