What is the difference between CEX and DEX? (Trading platforms)

Centralized Exchange Architecture

1. Centralized exchanges operate through a single corporate entity that controls user funds, order matching, and custody.

2. Users must undergo KYC verification before depositing assets or initiating trades.

3. Order books are maintained on proprietary servers, enabling high throughput and low-latency execution.

4. Withdrawals and deposits rely on the platform’s internal database and banking rails, often involving multi-sig cold storage for asset protection.

5. Platform uptime, security audits, and regulatory compliance are managed entirely by the exchange’s internal team.

Decentralized Exchange Mechanics

1. DEXs deploy smart contracts on blockchains like Ethereum or Solana to automate trade settlement without intermediaries.

2. Liquidity pools replace traditional order books in many implementations, with users providing tokens to earn fees proportional to their share.

3. Wallet connectivity replaces account creation—users retain private key control at all times.

4. Transactions are settled directly on-chain, making them publicly verifiable and resistant to unilateral reversal.

5. Governance tokens often grant voting rights over protocol upgrades, fee structures, and liquidity incentives.

Fund Custody Models

1. On CEXs, deposited assets are transferred into the exchange’s wallet addresses, effectively becoming liabilities on its balance sheet.

2. Users receive IOUs denominated in the asset type, not the actual cryptographic ownership.

3. In contrast, DEXs never hold user funds—tokens remain in the user’s wallet until a transaction is signed and broadcast.

4. Smart contract logic enforces atomic swaps: either both legs of a trade execute or neither does.

5. Losses due to exchange insolvency or hacking cannot affect DEX users’ self-custodied balances.

Liquidity Sourcing Methods

1. CEXs attract liquidity via market makers who receive rebates and co-location access to exchange infrastructure.

2. Order book depth is enhanced through algorithmic trading bots operating under centralized risk parameters.

3. DEXs rely on incentivized liquidity provision, where LPs lock token pairs and earn a percentage of swap fees.

4. Automated market makers adjust prices using mathematical formulas like x * y = k, introducing impermanent loss as a structural trade-off.

5. Cross-chain bridges and aggregators now route orders across multiple DEXs to simulate deeper liquidity without central coordination.

Regulatory Exposure Pathways

1. CEXs face direct jurisdictional oversight, including AML reporting obligations and licensing requirements in major markets.

2. Enforcement actions have targeted specific platforms for unregistered securities offerings or commingling of client assets.

3. DEXs avoid direct liability by design—their code runs permissionlessly and cannot be shut down by any single authority.

4. Regulatory scrutiny has shifted toward frontend interfaces, token listings, and entities funding protocol development.

5. Some jurisdictions now classify certain DEX-related activities—including frontends operated by identifiable teams—as subject to licensing.

Frequently Asked Questions

Q: Can I use the same wallet address across multiple DEXs?A: Yes. Since DEXs interact with your wallet directly, the same Ethereum or Solana address can be used on Uniswap, PancakeSwap, Raydium, and others without re-registration.

Q: Do CEXs ever support non-custodial features?A: A few offer limited self-custody options such as native wallet integrations or hardware wallet sign-in, but asset movement still requires internal approval and remains subject to platform policy.

Q: Why do some DEXs charge higher gas fees than others?A: Gas cost depends on the underlying blockchain’s congestion level and the complexity of the smart contract interaction—not the DEX brand itself. A trade on Arbitrum may cost less than one on Ethereum Mainnet even if both use identical UIs.

Q: Are stablecoin trades on DEXs always executed at 1:1 value?A: No. Price slippage occurs based on pool reserves and trade size. Large swaps against shallow liquidity can result in significant deviation from the expected rate, especially for less common stablecoin pairings.