Centralized and Decentralized Exchanges: The Beginner's Guide

Introduction: The Two Front Doors

You know the fundamentals: what crypto is, how to store it in a wallet, and how the market flows on cycles of bull upticks and bear downturns. But eventually, each newcomer confronts the great questions.

“Okay. How would I purchase actual crypto though?”

That’s where exchanges step in, the “front doors” to the cryptoverse. And they pretty much fall into one of two categories that you’ll hear about.:

• The Centralized Exchange (CEX): just imagine a bank or stockbroker for cryptocurrency.
• The Decentralized Exchange (DEX):  quite literally, a peer to peer trading floor on a blockchain fuel

They each have a benefit, a tradeoff, and a risk. You should know them before making that inaugural step. Let us dissect step by step.

The Centralized Exchange (CEX) - The Crypto Bank

CEX stands for Crypto Exchange. It is essentially a business that comes between you and the crypto markets. You’ll find well known options as LBank, Coinbase, and Binance. You make an account, confirm your ID, connect your bank card, and you are set up to purchase crypto.

When buying Bitcoin or Ethereum on a CEX, the exchange normally keeps the assets for your custodial storage. It’s super convenient, though that comes at a cost.

The Benefits of CEXs

• Ease of Use: simple dashboards, intuitive buttons, phone apps that sound just like Internet Banking.
• Fiat On-Ramp: you Purchase cryptos using dollars, euros or the local unit.
• Liquidity: Large CEXs handle billions a day, and that translates to instant trades and fair prices.
• Support: Something doesn’t work out? You email or phone customer support is something that doesn’t often exist in crypto.

The Disadvantages of CEXs

• Not Your Keys: you may end up losing money if the exchange was hacked or closed down (Think FTX?).
• Privacy Trade Off: CEXs are required to abide by KYC (Know Your Customer) for reasons of legality. That includes uploading IDs, something that some people dislike.
• Centralized Target: With the amounts they hold being massive, CEXs are big targets for cyber attackers.

In short the answer is that a CEX is the simplest to get started with, but you are entrusting a middleman.

The Decentralized Exchange (DEX) - Your Own Trading Floor

And the ultimate extreme case: no company, no accounts, no verification. That’s a DEX. Instead of a company, a smart contract on the chain.

When you buy and sell on a DEX, you enter your wallet (like MetaMask or Trust Wallet) and trade one on one with another. Nobody ever gets their hand on your money in advance since you are completely in control at all times. 

The Benefits of DEXs

• Self Custody: You own your assets, not an intermediate party.
• Permissionless: You have a wallet? You trade. No gatekeeping, no registration.
• Early Access: Most newly minted tokens debut on DEXs prior to reaching a CEX.

The Disadvantages of DEXs

• Steeper Learning Curve: Gas fees, slippage, liquidity pools, and it can be intimidating at first.
• No Fiat gateway: You are unable to exchange. You must have a crypto in your wallet that you already have.
• Has Fees: One action on a chain such as Ethereum might be a few dollars (and a few more at busy periods).
• Liquidity Issues: With small tokens, you might lack ample buyers/sellers to get a favorable price.

In short it is basically a DEX that offers freedom and anonymity while demanding increased responsibility.

CEX vs DEX - Side by Side

Here’s how they stack up: 

Think of it this way:

• CEX is just like an airport. It gets you on board efficiently, securely, and with direction.
• DEX is the open road. You can go wherever you would like to, but you drive.

Your Action Plan - Executing Both Judiciously

So which to use? The answer is that most fastidious users don’t use one, they use both. 

• Start with CEX: it is the quickest, hassle free means of exchange fiat for cryptocurrency.
• Transfer to Wallet: After buying a crypto, transfer it to a non custodial wallet.
• DEXs: Get a feel for tokens swaps on a DEx. You’ll get exposure to DeFIi, NFTs, and thousands of blockchain applications.

The hybrid approach enables you to experience CEX convenience and freedom while on DEXs without trusting both parties fully.

Conclusion - The Golden Rule

At the end of the day, whether one is buying on a high profile CEX app or swopping tokens on a DEX, one principle stands tall:

Not your keys, not you crypto.

A CEX would be safer since it feels familiar, yet you are not in charge of the private keys. A DEX would be scarier since it feels DIY, yet the keys are yours.

The balance between convenience and control is the real lesson here. And the best users learn to master both tools, CEXs as a simple on-ramp, DEXs as a personal playground, and wallets as a final vault.

CEX and DEX for Beginners FAQs

• Which is safer, a CEX or a DEX?
  • Neither is 100% safe. A CEX carries risk like hacks or bankruptcy, while DEX relies on smart contracts (which can have bugs) and your ability to handle your wallet securely.
• Can I buy crypto directly on a DEX?
  • No. You couldn’t use fiat on a DEX. You would have to purchase a crypto on a CEX and then shift that to a wallet and use a DEX.
• Do I need both a CEX and a DEX?
  • Yes, most users end up using both. Start with a CEX to buy, then use a DEX for trading and exploring blockchain apps.
• What’s cheaper: trading on a CEX or DEX?
  
  • It depends. CEXs charge fixed trading/withdrawal fees. DEXs often have lower fees but add variable gas fees. For small trades, CEXs are usually cheaper

This article is contributed by an external writer: Razel Jade Hijastro.

 
Disclaimer: The content created by LBank Creators represents their personal perspectives. LBank does not endorse any content on this page. Readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor can this article be considered as investment advice.