How to Live Without CEX
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Living without CEX can be frustrating, right? Well, it might not be as hard as you think. In fact, you might just forget about it after a while.
Still not convinced? In this article, we’ll highlight the differences between centralized and decentralized exchanges, and explore how to navigate the ecosystem while practicing abstinence from centralized exchanges. Jump in!
CEX vs. DEX: What’s the Difference?
Centralized exchanges have been the backbone of the crypto industry for years. However, it seems that they have also become one of the most visible points of failure in the crypto ecosystem.
The collapse of FTX showed that CeFi brings many uncertainties into the game. Now more than ever, crypto enthusiasts are moving away from CeFi and towards DeFi. Before we begin, let’s first define two types of exchanges.
Centralized Exchanges (CEX) are currently the most popular platforms for buying and selling cryptocurrencies. Although they are easy to use, offer a wide range of features and support numerous payment gateways, they are also potentially very risky.
Decentralized Exchanges (DEX)on the other hand, are newer and increasingly popular. These exchanges are much more secure than CEXs and are not as vulnerable to attacks. DEXs also offer a variety of features and are easy to use.
The main differences between centralized and decentralized exchange are:
- Safety: CEXs are much more vulnerable to attack because they are centralized. This means that all the funds stored on the exchange are in one place, making them an easier target for hackers. The funds are also held by the exchange instead of the users, which makes misuse of the funds much more likely. DEXs are decentralized, meaning that funds are stored in the wallets of individual users and not in the exchange itself. This makes them much less vulnerable to attack.
- Features: CEXs offer a wide range of features and investment options. DEXs, on the other hand, offer fewer features but are much safer. Despite this, the decentralized exchange has improved significantly in recent months and years, introducing various features that narrow the gap between the two.
- Ease of use: CEXs are generally considered much easier to use than DEXs. This is because they have been around longer and because they use a similar system to regular markets. However, DEXs are becoming more popular and much easier to use.
- Opportunity to access crypto: The main value proposition of centralized exchanges is that they are the primary gateway to crypto. However, people have more options when buying crypto with fiat now, as numerous web3 platforms offer gateways from fiat to crypto.
Centralized Exchange (CEX)
CEXs work in the same way as stock markets: they use the order book method.
An order the book is an electronic ledger that coordinates buy and sell orders on a specific exchange. Every centralized crypto exchange includes an order book, but as we can see, the order books can be slightly different depending on the CEX. Each order book contains:
- Offers or purchase orders
- Asked or sold orders
- The price at which orders are placed
- The total number of cryptocurrencies included
Each crypto pair has a different crypto order book. The order books show all limit order information. This refers to the orders that traders and investors decide to place at certain target prices. Users can also use market orders, in which case they fill a limit order and withdraw liquidity from the market.
CEX: Good 👍
Centralized exchanges have many advantages that set them apart from their decentralized counterparts.
Their main advantage is that they have a habit more liquidity. Binance, for example, regularly records over $30 billion in daily trading volume. This ensures that users can seamlessly exchange their crypto assets at any time regardless of their order size.
A centralized exchange also offers more payment methods: They have been the primary way to access the crypto market for a long time. Most CEXs support credit and debit card purchases, debit card transfers and more.
A centralized exchange also offers more features. They are one-stop shops for investors who want to buy, hold, trade or invest crypto. Distributed centers are generally more decentralized because they offer a more specialized set of services.
CEX: Bad 👎
A centralized exchange has a few significant drawbacks.
First, there are a lot more of them vulnerable to attack like a decentralized exchange. Since all the funds are stored in one place, hackers have a greater incentive to try to steal them.
There are also centralized exchanges less secure because the funds are held by the exchange and not by the users. This makes them much more likely to be misused.
Last but not least, the main value proposition of centralized exchanges is that they are the primary gateway to crypto. However, with numerous net3 platforms offering fiat-to-crypto gateways, the main advantage of a centralized exchange is becoming less relevant.
Practicing safe CEX use is important!
The collapse of FTX has raised questions about the security of a centralized crypto exchange. FTX was the second largest CEX in the market. Earlier this month, the exchange announced that it would suddenly shut down and that users would not be able to withdraw their funds. This has left many investors concerned about the safety of their funds on centralized exchanges.
Although many exchanges are now more transparent and publish their audited proof of reserves showing the exchanges’ assets and liabilities, there is still room for misappropriation of customer funds.
There have been several instances of centralized exchanges shutting down without warning, leaving investors unable to access their funds. In most cases, the exchanges have eventually returned to investors. However, there is no guarantee that this will always happen, and investors are at risk of losing their money if the exchange goes bankrupt or closes without warning.
The phrase “no keys, no coins” refers to the fact that you only have full control over your funds if you own the keys to your crypto wallet.
A centralized exchange is also vulnerable to hacker attacks. In January 2019, Binance suffered a major hack where 7,000 bitcoins were stolen. This is just one example of the many hacks that have occurred on centralized exchanges.
Overall, it’s important to be aware of the risks associated with centralized exchanges and take steps to protect your funds. It is recommended to keep the funds in a wallet that you control, rather than entrusting them to an exchange. And if you decide to use a centralized exchange, keep only a small amount of funds there and take extra security measures like 2-factor authentication.
Decentralized Exchange (DEX)
Unlike CEXs, decentralized exchanges (DEX) work a little differently. Instead of an order book method, most DEXs use liquidity pools to regulate the pricing of crypto assets.
A liquidity pool is a digital wallet consisting of two cryptocurrencies locked in a smart contract. This leads to the creation of liquidity between the cryptocurrency pair to create faster transactions.
One of the main components of liquidity pools are automated market makers (AMM). AMM is a smart contract protocol that uses liquidity pools to enable digital asset trading in an automated manner instead of traditional buyers and sellers markets. The price of cryptocurrency is determined using a formula.
Advantages of DEX
First, decentralized exchange is safer because they are less vulnerable to hacker attacks. They do not have a single point of failure, so if one exchange crashes, users can still use their funds on other exchanges. Since users have their own private keys, there is no risk of a hack targeting multiple wallets at once.
Decentralized exchange also offers more privacy and censorship resistance than their CEX counterparts. Since all data is stored on the blockchain, it is much more difficult for governments or hackers to monitor user activity or interfere with transactions.
And finally, decentralized exchange is a a gateway to decentralized finance and the NFT ecosystem. DEXs allow users to enter the world of smart contracts and dApps that provide financial services including lending, staking and saving products and NFT projects.
Disadvantages of DEX
One downside of a distributed exchange is that there may be a bit more of them difficult to use. They often have a more complex interface than centralized exchanges, and finding the right order book or liquidity pool can be difficult.
Another downside is that DEXs are still relatively new and may not have as many features or as much liquidity as centralized exchanges. They also tend to be more slowly like a centralized exchange. The positive is that they develop quickly and offer a more versatile set of features.
Finally, a decentralized exchange can be less reliable like a centralized exchange. This is because they have not been tested as well and may have more bugs. While it is true that there is no single point of failure like CEXs, we have seen numerous DEX attacks that have affected the market.
Trading on DEX
Trading on DEX is somewhat different from trading on CEX. After connecting your wallet, you can choose the blockchain and cryptocurrency pair you want to work with.
DEX calculates the exchange rate of your cryptocurrency, which changes due to fluctuations in the liquidity pool. You can then exchange one cryptocurrency for another.
When trading on DEX, make sure you set your slip to a percentage you are comfortable with.
If, on the other hand, you want to earn passive income, you can act as a liquidity provider for the stock exchange. However, one thing you need to pay attention to when trading is permanent loss.
A permanent loss means the moment when a change in the token price makes your share in the liquidity pool worth less than the value of your deposit. This loss is called permanent because the token price can return to a bargain price. However, if you decide to withdraw your crypto from the liquidity pool, this loss becomes permanent.
How to buy crypto with credit card?
As we have mentioned before, decentralized protocols and initiatives are gradually becoming more and more popular as they introduced direct gateways to buy crypto without having to interact with custodians of digital assets.
CoinStats has partnered with Mercury and MoonPay to offer its users a fast and reliable way to buy crypto with a credit card without having to visit a centralized exchange.
Decentralized exchanges act as a gateway to the DeFi industry, where users can participate in various projects, help with project funding, or invest their money through staking, yield farming, lending, buying NFTs, and more.
But if you decide to enter the world of DeFi, you might face one big problem: your money is scattered across different platforms!
CoinStats offers a variety of tools for users to monitor their portfolios, including price charts, open orders, and market data. You can monitor your DeFi and NFT portfolio as well as your CEX or DEX wallet. It is also possible to view your portfolio in different currencies and the distribution of holdings and profits and losses on different platforms.
Our platform also allows users to compare the performance of their portfolio with that of other users. When you see how well you’re doing compared to other members of the community, you can draw the right conclusions and fine-tune your investment strategy.
CoinStats is a cryptocurrency portfolio management platform with over 250,000 active monthly users that offers its customers a solution to track and manage all cryptocurrencies from a single interface.
Check out the CoinStats homepage or download our app for free from the Google Play Store and the Apple App Store.