Cryptocurrency exchanges are platforms that allow users to trade cryptos, and they're broadly distinguished as either centralized exchanges (CEXes) or decentralized exchanges (DEXes). Most people invest in crypto on a centralized exchange, and that may be the more accessible and safer option for average users. But it's also important to understand decentralized exchanges, which you need to use if you want to buy certain types of crypto and participate in different parts of crypto ecosystems.
What Is a Centralized Exchange?
A centralized crypto exchange is one that's created and run by a company. These exchanges are considered centralized because one company oversees all the transactions and sets the exchange's rules and fees. For example, Coinbase, Crypto.com and FTX create and run popular CEXes for a profit. The companies offer browser-based platforms and mobile apps, and they can make money when you use their exchanges to buy or sell cryptos.
To get started, you have to create an account, verify your identity and connect a funding source, such as a debit card or bank account. You can then buy, sell or trade between any of the cryptos the exchange supports. And some platforms offer additional features, such as the ability to earn interest by lending or staking your crypto. If you have trouble, the company may have customer support staff that can help answer your questions.
One important distinction between a CEX and DEX is that you have a custodial crypto wallet with a CEX. This means that the company keeps track of how much crypto you have and stores it on your behalf, but you don't have the private keys that give you direct control over the crypto. Instead, you have your account login information.
While CEXes are some of the most popular options, especially among beginners, consider the pros and cons:
Benefits of a Centralized Crypto Exchange
- Often offers an easy-to-use interface
- Generally complies with state and federal regulations
- Can help you access your account if you forget your login information
- Could have insurance to protect your crypto from hacks
Drawbacks of a Centralized Crypto Exchange
- You have to trust the company to keep your crypto safe
- Exchange decides which cryptos it will list and allow you to buy
- You might not be reimbursed if someone steals your login information
- Exchange might freeze your account or suspend support for certain cryptos
What Is a Decentralized Exchange?
A decentralized exchange is an automated program that facilitates crypto trades. A person or group might set up and help oversee the development of a DEX. However, as with other decentralized finance (DeFi) apps, it's actively run by a decentralized network of computers, meaning no single entity has control over the platform once it's set up.
The original creators and the people running the exchange may hold on to a crypto that's associated with the exchange (its "native" token). Holding the token could allow them to vote on changes to the platform, and the token might increase in value if the exchange becomes more popular.
Unlike a CEX, you don't have to create an account to use a DEX. Instead, you visit the DEX's online app and connect your crypto wallet. You can then buy or sell cryptos, and the DEX will automatically try to process your order.
DEXes often support a wide variety of cryptos, including brand-new offerings you might not find on a CEX. However, many DEXes don't support dollar-to-crypto trades, meaning you need to add funds to your crypto wallet before using a DEX. You can do this with a CEX, and some DEXes work with an "onramp" tool that lets you buy crypto. Additionally, many DEXes only support cryptos from a single blockchain, meaning you might not be able to directly trade Bitcoin for Ethereum like you can with a CEX.
You also won't find as much, or any, customer support from a DEX. In fact, a common scam is when someone claims to be from customer support and then tricks people into sharing their crypto wallet details, which allows the fraudster to steal the funds. You also might not have any recourse if someone hacks the DEX, or if you use the DEX to buy a crypto that turns out to be a scam.
Still, a DEX may be the only option for people who want to fully control their crypto and explore the brand-new offerings. As an overview, some of the pros and cons are:
Benefits of a Decentralized Crypto Exchange
- Complete control of your crypto
- Don't have to create an account or verify your identity
- Offers access to cryptos that aren't listed on CEXes
- Could have lower transaction fees than a CEX
Drawbacks of a Decentralized Crypto Exchange
- Might be harder to navigate and use
- You might lose your money if someone hacks the DEX
- Possible additional fee for each transaction
- You might be on your own if there's an issue
Which Type of Crypto Exchange Should You Use?
For most crypto investors and traders, a centralized exchange is going to be the best starting point. The intuitive interfaces, customer support and safety measures can make buying and trading cryptos easier—although it's important to remember that using a centralized exchange doesn't make investing with crypto any safer: There's still the risk of losing all your money. From there, you could learn how to create and use a crypto wallet, and then try using a decentralized exchange if you want to continue exploring the world of cryptos.