How Centralized and Decentralized Crypto Exchanges Work
Summary
This guide explains how centralized exchanges (CEXs) and decentralized exchanges (DEXs) handle crypto trading. A CEX is operated by a company, requires account setup and identity checks, and typically holds customer funds. It matches orders through an order book, charges trading fees, and may act as custodian and clearing counterparty. The guide also describes order types, cold and hot storage, and additional services some platforms provide.
For comparison, it outlines DEXs, where smart contracts and automated market makers facilitate swaps from liquidity pools. Users connect a personal wallet, and tokens go directly to that wallet rather than being deposited with the platform. The discussion identifies convenience and integrated services as CEX advantages, while custody, hacking, and fees are drawbacks; DEXs offer self-custody but can have liquidity, usability, and fiat access limitations. These are broad descriptions rather than a detailed assessment of exchange security, market quality, or specific platforms, and claims about protection or safety should not be treated as guarantees.
Key ideas
- A centralized exchange is managed by a company and generally holds users’ deposited funds and crypto.
- CEXs match buy and sell orders through an order book and earn revenue from trading fees.
- Cold storage can reduce online exposure, while funds in hot wallets remain connected to the internet.
- A decentralized exchange uses smart contracts and liquidity pools, commonly through an automated market maker.
- DEX users trade from connected wallets, but may face liquidity, usability, and fiat access constraints.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.