Differences Between CEX and DEX
Structure and Control:
CEX (Centralized Exchange): Operated by a central authority or company (e.g., Binance, Coinbase, Kraken). It acts as an intermediary, managing trades, user funds, and platform operations. Transactions are processed off-chain using an order book system, similar to traditional stock exchanges.
DEX (Decentralized Exchange): Operates without a central authority, using blockchain technology and smart contracts for peer-to-peer (P2P) trading. Most DEXs (e.g., Uniswap, PancakeSwap) use Automated Market Makers (AMMs) with liquidity pools instead of order books, though some use on-chain order books. Users trade directly from their wallets.
Custody of Funds:
CEX: Users deposit funds into exchange-controlled wallets, meaning the exchange holds custody of private keys. This introduces a risk, as users must trust the platform.
DEX: Non-custodial, meaning users retain control of their private keys and funds in their own wallets. Trades occur wallet-to-wallet, reducing reliance on a third party.
KYC (Know Your Customer) and Privacy:
CEX: Requires KYC verification, involving personal identification (e.g., ID documents) to comply with regulations like AML (Anti-Money Laundering). This reduces user privacy.
DEX: Typically permissionless, requiring no KYC or personal information, offering greater anonymity and privacy.
Liquidity and Trading Volume:
CEX: Generally offers higher liquidity and trading volume due to centralized order books and large user bases, resulting in tighter spreads and faster trade execution.
DEX: Often has lower liquidity, especially for less popular tokens, leading to higher slippage (price differences between expected and executed trades) and slower trades.
Trading Mechanism:
CEX: Uses an order book to match buyers and sellers, allowing advanced trading options like margin trading, futures, and limit orders. Transactions are processed off-chain for speed.