CEX Or DEX: Where Should You Buy Your Crypto?

The following is a contributed article from a content partner of Benzinga

There is a wealth of trading venues in the cryptocurrency space, with many promising superior UX, fiat onramps, 24/7 customer service and support for countless cryptocurrencies. Although the emergence of modern payment companies like Square and Cash App have helped to onboard mainstream users, digital asset exchanges remain the industry’s primary gateway.

Broadly speaking, there are two types of exchange: those that are centralized (CEX) and custodial and those that are decentralized (DEX) and non-custodial. While the former CEXes are far more established, the latter DEXes have gained prominence in recent years, particularly with the phenomenal growth of Uniswap, the DEX that leverages an automated market maker instead of a central limit order book. In September 2020, Uniswap’s trade volume managed to surpass that of Coinbase, a shot across the bows and something of a wake-up call to centralized platforms everywhere.

This has led to fragmentation, with thousands of tokens spread across exchanges that fall into either camp or into a different category entirely – hybrid models that seek to deliver the best of both worlds. The 100 million satoshi question is this: which type of platform should users favor for their crypto needs?

Liquidity, Stability and Fiat Gateways

CEXes have many advantages over decentralized alternatives, not least superior liquidity and stability, two prerequisites for a satisfying trading experience in a market notorious for its volatility. According to CoinMarketCap, centralized platforms lead the way in terms of 24-hr volume, with Uniswap – which has a DEX market share of almost 40% – sitting outside the top 5, behind Binance, Huobi Global, Coinbase Pro, Kraken, and Bithumb.

Because CEXes are capable of handling sizable orders, it’s possible to buy a few million dollars of cryptocurrency in just a few clicks with minimal slippage. For this reason, high-volume traders and whales are obliged to use established custodial platforms. Thus, when publicly traded company MicroStrategy bought up $425 million worth of bitcoin, they utilized the services of a centralized platform.

It’s not just the deep reserves of liquidity that set centralized platforms apart from their DEX counterparts, though. These venues also cater to a much broader range of markets, and boast fiat gateways that enable everyday users to buy crypto using their local currency.

CoinZoom goes a step further, offering users a native Visa card that enables them to spend crypto and fiat balances at over 53 million merchants. Depending on the tier they choose, cards confer benefits such as cashback rewards, trading fee discounts, airdrop eligibility, high-level security, customer support, free wire transfers and ATM access. This is something that we simply don’t see with DEXes; because they are managed like other regulated financial entities, centralized platforms can mirror the better elements of traditional banking while giving users access to a new kind of asset class.

Onramps that allow users to trade fiat for crypto are utterly essential, and help to garner institutional interest from investors more accustomed to plying their trade on the stock market. By comparison, DEXes tend to cater to those who already have an intimate knowledge of crypto, since they allow only for the trading of one token for another on a single blockchain, usually Ethereum.

Keeping Regulators Onside

Regulation is another topic that tends to crop up when debating the merits of different exchanges, and naturally so: after all, safety of funds is paramount and compliance frameworks seek to protect parties from being ripped off.

This matter goes beyond CEX or DEX, though: a great many centralized platforms have fallen foul of regulators over the years, just as DEXes have drawn criticism from the Securities and Exchange Commission (SEC), particularly for their non-compliance with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.

Of course, it’s true that some users will value the anonymity provided by DEX platforms, for various reasons. In any case, the EU recently introduced a proposed regulation that seeks to ban DEXes from providing trading to any EU citizens unless they are incorporated as a legal entity in the continent. That’s got to be worrying for would-be DEX users based in Europe.

When it comes to choosing a regulator-friendly platform, it’s necessary to park the CEX/DEX issue at the door and judge venues on their merits. The founding team behind CoinZoom boasts extensive U.S. and International regulatory experience, with their previous companies having been regulated by the CFTC, NFA, and FINRA. This provides a strong foundation for avoiding the sort of scandals that have plagued the likes of BitMEX, OKEx, and KuCoin. As a U.S. registered Money Services Business (MSB) and Money Transmitter, CoinZoom is one of a few CEXes audited annually by American regulators.

Safety of Funds

It is true that hackers have exposed flaws in both decentralized and centralized exchanges to steal funds, and consequently, it would be disingenuous to claim that either model is entirely safe in this regard. Again, it’s vital to assess safety on a case-by-case basis. Thankfully, a number of venues provide users with insured cryptocurrency wallets which, coupled with multi-layer security protections such as 2FA and holding client assets in cold storage, helps to assuage concerns.

While the traditional banking system has many flaws, no bank worth its salt tells users, “Your funds were stolen.” Rather, account-holders are assured that their savings are safe – even if the bank is robbed. The best crypto exchanges, including CoinZoom, give users the same reassurance. Like their banking counterparts, they also invest big in customer service to provide assistance whenever users run into difficulties.

Needless to say, there are other factors users are likely to consider when weighing up what sort of exchange they want to use: user experience and convenience, speed of order execution, custody vs self-custody. On these battlefronts, the war between CEXes and DEXes is likely to rage for years to come.

About the Author:

Todd Crosland is the Founder and CEO of CoinZoom, a highly regulated, institutional-grade cryptocurrency exchange catering to both experienced traders and casual investors.