#CEXvsDEX101 A decentralized exchange (DEX) is a cryptocurrency trading platform that operates without a central authority. These protocols use smart contracts to automate peer-to-peer transactions, allowing users to directly exchange their digital assets without intermediaries.

The operation of DEXs is based on liquidity pools funded by users, who become liquidity providers in exchange for rewards. This collaborative approach maintains sufficient trading volumes without the need for a centralized order book.

The main advantages of DEXs include total transparency (all transactions are public on the blockchain), the non-custodial aspect (you keep control of your private keys), and the elimination of hacking risks associated with centralized exchanges.

The difference between a DEX and a CEX

Centralized exchanges (CEX) operate as traditional intermediaries where you must deposit your cryptocurrencies into their accounts. They offer a familiar user experience and significant liquidity, but expose you to hacking and censorship risks.

CEX vs DEX

DEXs prioritize autonomy and security by allowing you to operate directly from your personal wallet. You retain your private keys and eliminate the risks of account freezing. However, they require more technical knowledge and may have higher network fees.

In a CEX, your cryptocurrencies are entrusted to the platform, so it’s as if they don’t belong to you. The only way to have total control over your cryptocurrencies is to have your own wallet and, therefore, operate on decentralized exchanges.

In terms of regulation, CEXs must comply with KYC/AML obligations, while DEXs operate in a permissionless manner without identity verification. Fees also differ: CEXs charge fees based on volume, while DEXs charge protocol fees plus blockchain fees.