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Centralized exchanges (CEXs) and decentralized exchanges (DEXs) share a standard functionality in that they both enable users to buy cryptocurrencies—however, they have distinct features that set them apart. Unlike decentralized exchanges, centralized exchanges are businesses with a corporate structure. Typically, CEXs have more features than DEXs, and are usually the first type of exchange new users encounter, as the majority of CEXs are also ‘on-ramps’—meaning they enable cryptocurrencies to be directly purchased with fiat currencies, something that DEXs currently cannot directly offer users due to their decentralized nature.

DEXs are smart contracts running on a blockchain, most commonly interacted with via websites with user-friendly front-end interfaces. DEX users don’t have to sign up with an email address, provide personal information, or trust a centralized party with their funds; DEXs are non-custodial, as users are the custodians of their own funds and they only have to connect a crypto wallet (for example, MetaMask) to the DEX’s website to conduct trades.

To use a CEX, users must first create an account with an email and password and provide private information, such as government-issued personal identification, during the account creation process. CEXs are custodial, meaning users must deposit funds onto the exchange and trust that the CEX will not misappropriate users funds, and they use a centralized limit order book with customers submitting trade orders to a database hosted on the exchange’s servers.

DEX users transact with each other directly, via an Automated Market Maker (AMM) protocol instead of a centralized order book. Price discovery on AMMs is effectively dictated in accordance with the supply and demand of traded crypto assets, based on the user-deposited crypto within Liquidity Pools, in comparison to liquidity being provided by centralized entities on a CEX’s limit order book. Crypto asset prices offered via AMM DEXs are kept in parity with centralized exchanges via arbitrage, ensuring that market prices available to DEX users are comparable to those on centralized exchanges.