CEX vs DEX Showdown: What's Right for You?

Hyperliquid has grabbed the headlines by becoming the leading decentralized perpetual swap platform, recently recording more daily trading volume than other top platforms like Jupiter, SynFutures, and dYdX, with nearly $1.39 billion in volume. 

Hyperliquid operates as a Layer 1 app chain, enabling users to trade perpetual derivatives with leverage by aggregating liquidity across sources.

Hyperliquid = "Onchain Binance"

Hyperliquid operates on its own L1 blockchain. This bespoke L1 is designed for high-performance trading with an order book fully on-chain, which differentiates it from many existing perp DEXs that use off-chain order books to reduce validation load. 

With a gasless trading experience and specific mechanisms for high-frequency trading (HFT), Hyperliquid has an edge in optimizing transaction priority and reducing friction for market makers.

Unlike other general-purpose chains, Hyperliquid’s L1 is tailor-made to support its order book and trading experience, handling key functionalities like atomic liquidations and funding distributions. 

The platform’s on-chain order book provides a significant moat, allowing for seamless integration with native DeFi applications that can benefit from transparent and composable trading infrastructure. Unlike dYdX, which relies on off-chain order books, Hyperliquid’s fully onchain system boosts transparency and aligns closer to DeFi principles while aiming to rival CEXs.

The State of DEXs

While Hyperliquid has grabbed all the attention, it might make sense to look at the overall big picture and see

As per Dune Analytics, DEXs have reportedly had a whopping $27B in trading volume this past week. Here are some more insights:

• Uniswap and Ethereum both have the highest market share, in their respective categories.

• Uniswap and Pancakeswap account for a whopping 65.6% of the overall market.

What about the Solana ecosystem?

Raydium and Orca are both leading the way.

The State of CEXs

CEXs obviously tend to do a tremendous amount of volume. Here is a snapshot of a daily trading volume for both CEXs and DEXs.

Now, we understand that “24 hours” isn’t really a long enough time frame, but it still gives you a good idea of the discrepancy between the two. The following is a helpful chart that shows you the ratio between DEX and CEX. A higher ratio, indicates higher DEX activity.

A higher DEX activity usually means that the whales and degens are busy making multiple trades.

So, What Should I Use?

Before we answer this question, let’s make one thing very clear. There are pros and cons for both CEXs and DEXs.

Centralized Exchanges (CEX)

Pros:

1. Liquidity: CEXs have high liquidity due to their large user base, allowing for swift and efficient trades with minimal price slippage. The availability of buyers and sellers ensures that users can easily enter and exit positions.

2. Wide Range of Trading Pairs: They offer a diverse selection of cryptocurrencies, including major assets like Bitcoin and Ethereum, as well as various altcoins and stablecoins. This allows for diversification and access to a broad range of markets.

3. User-Friendly Interfaces: Centralized exchanges often provide intuitive interfaces that are easy for both novice and experienced traders. They include features like market charts, order books, and trading tools for informed decision-making.

4. Security Measures: Reputable CEXs implement robust security protocols such as encryption, two-factor authentication (2FA), and cold storage to protect user funds.

5. Fiat Integration: Many CEXs support the seamless exchange between fiat and cryptocurrencies, enabling users to deposit and withdraw funds directly from their bank accounts. This makes onboarding easier for new users.

Cons:

1. Lack of Control: Users must trust the CEX with their funds, which contradicts the decentralized nature of crypto. This centralization exposes users to potential mismanagement or misuse of assets.

2. Regulatory Vulnerability: Being centralized, these exchanges are more susceptible to regulatory interventions and compliance requirements, which could impact their operations and the services offered.

3. Custodial Risk: CEXs operate on a custodial model, meaning they hold user assets. This poses a risk of loss or disputes if the exchange fails to manage these funds properly or experiences security breaches.

Decentralized Exchanges (DEX)

Pros:

1. Lower Fees and Instant Settlement: DEXs typically have lower trading fees since they cut out intermediaries. Additionally, trades settle instantly on the blockchain, eliminating long withdrawal and deposit processes.

2. Security and Control: Users retain full control of their funds since they trade directly from their wallets, reducing the risks associated with hacks or mismanagement often found in centralized custody.

3. Global Accessibility: DEXs are accessible to users worldwide, bypassing geographical restrictions and regulatory hurdles. This borderless nature allows anyone with internet access to trade without extensive verification.

4. User-Custodied Funds: Users maintain full control over their crypto holdings, trading directly from wallets where they hold private keys. This decentralized control aligns with the principles of crypto, giving users greater autonomy over their assets.

Cons:

1. Liquidity Challenges: Liquidity can be a major issue on DEXs since they depend on users to create liquidity pools. This often leads to lower trade volumes, higher spreads, and slippage, making large trades difficult to execute efficiently.

2. User Experience Complexity: For beginners, using a DEX can be complex. Setting up wallets, understanding smart contracts, and managing order books are challenging for users unfamiliar with blockchain technology, leading to a steeper learning curve.

Key Differences Between CEX and DEX

1. Liquidity

   • CEX: High liquidity due to pooled funds and active market-making, allowing swift and efficient trades.

   • DEX: Generally lower liquidity as it relies on users to provide liquidity pools, which can result in wider spreads and higher slippage.
     

2. Trading Fees

   • CEX: Typically have higher fees, with additional costs for deposits, withdrawals, and specific currency transactions.

   • DEX: Lower fees overall, but network/gas fees may apply for transactions directly on the blockchain.
     

3. User Experience

   • CEX: User-friendly interfaces designed for simplicity, with various trading tools, charts, and features, making it easier for beginners.

   • DEX: More complex and technical, requiring users to connect wallets, interact with smart contracts, and understand decentralized protocols.
     

4. Control of Funds

   • CEX: Operates on a custodial model where users deposit their funds into the exchange's wallet, relinquishing control to the platform.

   • DEX: Non-custodial, meaning users trade directly from their personal wallets, maintaining full control over their assets.
     

5. Security

   • CEX: Centralized structure poses a higher risk for security breaches, as they are attractive targets for hackers due to the concentration of funds.

   • DEX: Enhanced security since funds are not centrally stored; users retain their private keys, reducing the risk of hacks and unauthorized access.
     

6. Fiat Integration

   • CEX: Often provides direct support for fiat currencies, enabling users to exchange between crypto and fiat seamlessly, which is ideal for new users.

   • DEX: Primarily focuses on crypto-to-crypto trading and typically lacks direct fiat support, requiring users to manage fiat conversions elsewhere.
     

7. Regulation

   • CEX: Subject to regulatory oversight, compliance requirements, and government interventions, which can affect their operations and user policies.

   • DEX: Faces less regulatory scrutiny due to its decentralized nature, but this also means less protection for users in case of disputes or issues.
     

8. Asset Availability

   • CEX: Offers a wide range of trading pairs, including major cryptocurrencies, altcoins, stablecoins, and fiat currencies, facilitating portfolio diversification.

   • DEX: Asset support can be limited, primarily depending on user-provided liquidity and technical compatibility, potentially restricting trading opportunities.

Ultimately, it’s about what stage you are in your user journey. If you are a beginner then it makes sense to use CEXs. If you are an expert degen, then you will obviously prefer DEXs.

I Want To Get Started With CEXs

If you want to get started with CEXs and trading, then we highly recommend that you sign up to The Coiners.

The Coiners is dedicated to making cryptocurrency accessible to all. Our mission is to democratize knowledge, enabling learners from diverse backgrounds to navigate and achieve success in crypto trading. We provide comprehensive education, a supportive community, and essential tools for every step of your trading journey.

As part of this journey, we will take you through the steps needed to create your own account on exchanges like ByBit, Blofin, and Bitunix.

Great! What Else Can I Do At The Coiners?

One of the best things The Coiners has to offer are weekly livestreams (every Tuesday) with some of the biggest trading experts in the world. This past week, we had VirtualBacon giving an overview of the crypto market, with a special emphasis on Bitcoin, AI, and memecoins.

If you haven’t seen it yet, check it out here:

In tomorrow’s LiveStream, we will be joined again by VirtualBacon, where he will break down when will the real Altseason start?

• Net Liquidity Trends: The hidden metric that’s accurately called every Altcoin bull run since 2017

• Key FOMC Signals: What Fed actions you need to watch and how they impact crypto

• The Catalyst for Altseason: What must happen for the next major rally

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Livestreams happen every Tuesday at 1 PM EST.