EXCHANGES & TRADING

Centralised Exchanges (CEX) vs Decentralised Exchanges (DEX)

Choosing where to trade crypto is one of the single biggest security and usability decisions you’ll make. Centralised exchanges give convenience, fiat rails, and deep liquidity, while decentralised exchanges give you direct custody, privacy, and permission-less access. This guide explains what each is, how to use them, strengths, weaknesses, real-world risks, and practical recommendations so you can pick the right tool for the job.

To assist in deciding which exchange is right for your investing goals, we recommend checking out our “Which Cryptocurrency Wallet is right for you?” lesson here.

What is a Centralised Exchanges (CEX)

A Centralised Exchange (CEX) is a crypto trading platform operated by a company or organisation that acts as an intermediary between buyers and sellers. It’s “centralised” because a single entity manages all operations, including user verification, order matching, liquidity provision, and custody of assets.

When you deposit funds into a CEX, you’re essentially trusting the platform to hold your crypto on your behalf. For comparison, it’s a very similar model to your traditional bank account. Your funds are stored in wallets controlled by the exchange, and you trade using account balances within their system rather than directly on the blockchain.

In practical terms, you don’t own the private keys to the assets stored on a CEX. Instead, the exchange provides you with access to an internal ledger that reflects your balance. This setup is similar to how traditional stock exchanges or online banking systems operate; convenient and user-friendly, but reliant on trust.

Common Examples:

Binance
Coinbase
Kraken
Bybit
OKX

Why Traders choose a Centralised Exchange

Centralised exchanges are favoured for their simplicity, liquidity, and speed. They’re often the first point of entry for new crypto investors because they support fiat deposits (bank transfers, credit cards, etc.) and offer familiar trading interfaces similar to those in traditional finance.

They also provide advanced services like margin trading, staking, futures, and API access for trading bots, all managed through a single account. However, because users must go through Know Your Customer (KYC) procedures and give up custody of their funds, this convenience comes at the cost of privacy and autonomy.

How to use a Centralised Exchange

These are the five steps for setting up and using your Centralised exchange account:

Create an account, complete KYC, connect email and 2FA.
Deposit fiat via bank/card or deposit crypto to the exchange address.
Place market or limit orders on the order book.
Exchange executes trade off-chain, updates your account balance.
Withdraw to a personal wallet if you want self custody.

It’s important to remember that if you choose to use a centralised exchange, you’re automatically choosing to use a hot wallet to hold your funds (unless you actively transfer in & out of the exchange into a warm or cold wallet). For a full breakdown of using a hot wallet, check out our “Which Cryptocurrency wallet is right for you?” lesson here.

Pro's and Con's of a Centralised Exchange

Here are the Pro’s & Con’s of using a Centralised Exchange:

Pro’s of CEX

Con’s of CEX

Liquidity and speed: Making large orders easier and slippage lower. Good for active trading.

Custody risk: The exchange holds private keys. If the exchange is hacked, insolvent, or fraudulent, user funds can be lost. (FTX is a headline example of CEX counterparty risk).

Fiat on/off ramps: Credit card and bank transfers are allowed in many jurisdictions.

KYC and privacy trade-offs: You trade under identity verification and possible surveillance.

User features: Margins, derivatives, advanced charts, staking, custodial services, and customer support.

Regulatory centralisation: Can lead to account freezes, withdrawals restrictions, or de-listings depending on local law.

Risks of a Centralised Exchange

Single Point of Failure
CEX centralises control within a single corporate entity that holds all user funds in custody. This creates a single point of failure: if the exchange is hacked, becomes insolvent, or suffers internal fraud, user assets are at risk. The collapse of FTX, Mt. Gox, and several smaller platforms illustrate how devastating this risk can be.

Operational Attacks
Because CEXs manage millions (sometimes billions) in customer assets, they are prime targets for hackers. Most exchanges use a mix of hot (online) and cold (offline) wallets, but breaches of internal systems, phishing of employees, or poor key management can still result in major financial losses.

Regulatory Interventions
Being centralised entities, CEXs can freeze accounts, restrict withdrawals, or block users based on government orders, sanctions, or regional compliance rules. This offers consumer protection to some extent but limits autonomy. Especially as an expanding asset class, the potential for account restrictions becoming linked to your account is greater.

Fees, Liquidity, Slippage, and Speed

CEXs generally charge maker/taker fees (around 0.1%–0.2%) and sometimes withdrawal or spread-based fees. These fees can range majorly across exchanges due to a number of factors. In some cases, exchanges factor in their fees by automatically modifying the live market price to show ‘after fees’ (less favourable feature across investors). Because trades are matched off-chain using order books, execution speed is instant and slippage is minimal, especially on large, liquid exchanges like Binance or Coinbase Pro.

This makes CEXs highly suitable for:

Institutional traders executing large orders (Consider OTC for $50,000+ transactions)
High-frequency trading and arbitrage (Day Traders)
Users seeking stable prices and low volatility between orders

Regulation and Compliance

CEXs are fully subject to jurisdictional laws. This means mandatory KYC/AML verification, data collection, and potential government oversight. While this can help prevent fraud and ensure some user protections, it also means trading anonymity is lost.

Most large CEXs (Coinbase, Binance, Kraken) hold licenses in multiple regions, maintain Proof-of-Reserves systems, and are increasingly transparent with their balance sheets. However users majorly rely on trust that the exchange is solvent and compliant. This highlights the importance of researching exchanges prior to investing funds into a live holdings account.

Safety Tips for Using a Centralised Exchange

Enable 2FA and use a unique password.
Whitelist withdrawal addresses when available.
Keep only the funds you actively trade with on the exchange. Consider adopting a cold wallet into your long-term portfolio holding strategy.
Research the exchange’s reputation, insurance policies, and Proof-of-Reserves prior to signing up & applying for KYC.
Treat your exchange account like a bank checking account, not a savings vault.
Use it for convenience, speed, and liquidity. Not long-term storage.
Always move assets to hardware wallets for long-term security.

What is a Decentralised Exchanges (DEX)

A Decentralised Exchange (DEX) is a blockchain-based platform that enables peer-to-peer (P2P) trading of cryptocurrencies without intermediaries. Instead of relying on a central company to hold funds and execute trades, DEXs use smart contracts; self-executing pieces of code that automatically handle trades directly on the blockchain.

When you use a DEX, you connect your personal wallet (such as MetaMask, Ledger, or Trust Wallet) and trade directly from it. This means you retain control of your private keys and your funds throughout the entire process. The trade occurs between two wallets, with the DEX protocol simply facilitating the swap or order matching on-chain.

DEXs can operate using different models:

Automated Market Makers (AMMs): These use liquidity pools instead of order books. Users provide pairs of tokens (for example, ETH and USDC) into a pool, and an algorithm determines prices based on supply and demand. Examples include Uniswap & PancakeSwap..
Order Book DEXs: Similar to traditional exchanges but executed on-chain. They maintain lists of buy and sell orders. Examples include dYdX and Serum.
Aggregators: Platforms that route trades through multiple DEXs to find the best price or lowest fees, such as 1inch and Matcha.

Common Examples

Uniswap (Ethereum)
PancakeSwap (BNB Chain)
Raydium (Solana)

Why traders choose a Decentralised Exchange

DEX’s are used by investors who prioritise security, privacy, and autonomy. Because trades occur directly between wallets, there’s no need to trust a third party with custody of your assets. You don’t have to create an account, submit identification, or rely on centralised withdrawal systems. True self-custody & self management can be reached through using decentralised methods.

However, DEXs demand a deeper understanding of blockchain mechanics; gas fees, slippage, smart contract risk, and wallet safety. They are less beginner-friendly but far more aligned with the true decentralised ethos of crypto.

How to use a Decentralised Exchange

These are the five steps for setting up and using your Decentralised exchange account:

Install or open a noncustodial wallet (MetaMask, Ledger, Trustwallet, etc).
Connect your wallet to the DEX site.
Select token pair, set slippage tolerance and gas limit.
Sign the transaction from your wallet, pay on-chain gas fees.
Transaction is mined, trade settles on-chain directly between addresses or via liquidity pools.
Security step: Disconnect your wallet from the DEX site when finished.

DEX trades are trust-less and atomic, but they require managing keys, gas fees, and on-chain risks such as slippage.

Pro's and Con's of a Decentralised Exchange

Here are the Pro’s & Con’s of using a Decentralised Exchange:

Pro’s of DEX

Con’s of DEX

Self custody: You keep control of private keys and funds until you sign a transaction. This removes single-custodian risk.

On-chain risks: Smart contract bugs, rug-pulls from unaudited tokens, liquidity impermanent loss, and user error.

Permission-less listings: Any compatible token can be traded without an approval gate, enabling early access to new projects.

MEV and front-running public meme-pools let bots reorder and sandwich transactions for profit, which can increase effective costs for retail swaps. Techniques exist to mitigate this, but it is a real on-chain risk.

Censorship resistance and composability: DeFi primitives can be combined programmatically across protocols.

Gas costs and UX: For example; on Ethereum mainnet gas can make small trades uneconomical, bridging and cross-chain trades add complexity.

Risks of a Decentralised Exchange

Distributed Code and Self-Custody
DEXs eliminate custodial risk by letting users retain control of their private keys. Funds only move when the user signs a transaction. This removes corporate failure risk but introduces smart contract risk; vulnerabilities in the code that could be exploited if increased due diligence from the holder isn’t active.

Operational Attacks
DEX vulnerabilities typically arise from smart contract bugs, oracle manipulation, or malicious token contracts interacting with the exchange. Rug-pulls in unaudited pools or compromised front-end websites can also endanger funds.

Regulatory Interventions
DEX’s are harder to regulate since they run as open-source smart contracts. However, front-end interfaces and aggregators (like Uniswap’s website) can still be restricted under legal pressure, and cross-chain bridges are increasingly scrutinised. In simple terms, the weigh-up of using a peer to peer system to eliminate the middle man also eliminates the security guard that ensures safe transaction success.

Fees, Liquidity, Slippage, and Speed

DEXs charge small swap fees (typically 0.05%–0.3%) that are distributed to liquidity providers, plus network gas fees that vary by blockchain. This minimal fee structure is superior to a CEX’s fee structure as there’s no middle man commission (Exchanges) taking place. However it’s important to express that whilst transaction fees are extremely minimal, less financially backed projects, such as majority of the Memecoins & DeFi token market require a greater slippage tolerance to fund the transaction. This increased slippage fee takes away from the total purchase quantity, and in its own way can be viewed as a not so different financial trade-off.

While trades are transparent and trustless, DEXs can experience:

Higher slippage on low-liquidity pairs.
Slower trade execution, since every transaction must confirm on-chain.
Network congestion, which can increase gas costs dramatically.

With these factors in mind, the overall consensus for semi-experienced investors looking for self-custodial & decentralised options for trading Cryptocurrency remains with using a decentralised exchange.

Regulation and Compliance

Unlike CEX’s, DEX’s don’t require KYC or user registration. However, global regulators are increasingly targeting DeFi protocols, front-end operators, and token issuers to enforce compliance. The SEC and similar bodies have begun investigating whether some DEX activities qualify as securities trading. But as at the current time of writing this (October 2025), no official requirements for KYC or user registration is required across the vast majority of Decentralised exchanges.

This evolving environment means DEXs remain accessible but not immune to legal pressure, especially as regulation tries to catch up with DeFi’s rapid growth.

Safety Tips for Using a Decentralised Exchange

Always trade using a cold (hardware) wallet or trusted warm (software) wallet.
Verify token contract addresses on official project channels.
Set realistic slippage tolerance and review gas estimates before confirming.
Start with small test swaps before making large transactions.
Always disconnect your wallet from the decentralised exchange directly after use.

Final Recommendations for using Decentralised Exchanges

Keep private keys secure and offline when not in use.
Trade only on reputable, audited DEX’s with sufficient liquidity.
Learn about gas, slippage, and smart contract risks before large trades.
Review your wallet permissions regularly to revoke unnecessary approvals.

Use a Decentralised Exchange when:

You want full control of your funds.
You’re trading new or early-stage tokens not yet listed on major CEXs.
You want privacy and permission-less access.
You’re participating in DeFi strategies like yield farming, staking, or liquidity provision.

Now that you know the differences between a Centralised exchange and a Decentralised exchange, our next lesson is a full breakdown about how to start using a Centralised exchange.