Centralised vs decentralised exchange (CEX vs DEX)

A centralised exchange, or CEX, is a company. It holds customers' money and coins and matches buyers with sellers. A decentralised exchange, or DEX, is a set of smart contracts. You trade from your own wallet with a pool of tokens, and no company holds your coins.

Side by side

What you are trusting

On a centralised exchange your balance is a record in the company's database. You hold a claim on the company and not the keys. Exchanges have been hacked, have frozen withdrawals and have gone bankrupt. Lesson 12 gives three examples.

On a decentralised exchange you keep your keys. You are trusting code. If the contract has a flaw, or you approve the wrong thing, nobody is obliged to make you whole.

What a trade costs

• Centralised: a trading fee, the spread, and fees to deposit and withdraw.
• Decentralised: the pool's fee, the network fee for the transaction, and the price impact of your own trade. In a small pool a large trade moves the price against you. A failed swap still costs the network fee.

Fake tokens

A centralised exchange decides what it lists. On a decentralised exchange anyone can create a token with the same name and symbol as a famous one. The only reliable identifier is the token's contract address, taken from the project's official site.

Which comes first

Most beginners start on a centralised exchange, because it accepts bank money and has a helpdesk. Lesson 13 gives a checklist for choosing one. A decentralised exchange only works from a wallet you control, which Level 2 teaches.