Centralized exchanges (CEX) have been the dominant model for trading cryptocurrencies, but decentralized exchanges (DEX) are on the rise. This article will explore what DEX is, how it differs from CEX, and what the advantages and limitations of DEX are.
What is DEX?
A decentralized exchange (DEX) is a platform that enables direct peer-to-peer (P2P) trading between users without the need for intermediaries such as banks or exchange platforms. Instead of a centralized authority holding funds and processing trades, transactions are conducted using smart contracts on a blockchain. DEX aims to make trading more secure by eliminating centralized points of failure, such as servers and private keys.
Key Differences between DEX and CEX?
CEX is a traditional exchange model where buyers and sellers trade through an intermediary, which could be an individual or a platform. The main difference between CEX and DEX is centralized vs. decentralized architecture. Besides, while CEX charges a fee for each trade, DEX operates on a peer-to-peer transaction model without any middleman. Additionally, DEX provides more privacy and security to users because it allows users to retain control over their digital assets.
Advantages and Limitations of DEX
Advantages: Decentralization is the most significant advantage offered by DEX that eliminates the need for intermediaries and provides a more trustless environment. Additionally, DEX offers more privacy since users are not required to provide personal information during the registration process. Limitations: DEX has a lower liquidity pool, which can make trading less convenient for users. Additionally, due to DEX's decentralized nature, transaction fees may be higher than in CEX, and users may experience network congestion during peak trading hours.
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