Crypto CEXs are centralized exchanges, while DEXs are decentralized exchanges. HEXs are hybrid crypto exchanges of CEXs and DEXs. They serve as the marketplaces for digital assets but differ primarily in their governance, where DEXs are controlled through consensus between users while CEXs rely on centralized governance. Due to the difference in governance structure, the functionality of the exchanges is greatly influenced, with several other features between the three types of exchanges becoming very distinct.
Though the first modern cryptocurrency, Bitcoin, was made to be a peer-to-peer (P2P) transactions asset, crypto exchanges were launched to offer more services linked to it and other coins. These exchanges are required in the crypto space to allow for the proper functionality of the exchange of digital assets. They serve as sources of liquidity and allow users to interconnect in a trustless way.
In the CEXs, orders are registered on Order books where makers’ and takers’ orders are matched according to the price they are willing to trade. Conversely, DEXs use liquidity pools where anyone can add or remove liquidity of supported assets in any proportion, but the price may differ according to the preset price equation.
These exchanges offer different crypto services, which require researching them to understand how they differ and which ones are better. Below is more information on how CEXs, HEXs, and DEXs compare.
Why Are Crypto Exchanges Needed in the Crypto Space?
Cryptocurrency exchanges ensure a smooth operation of crypto trading. They also offer support services like educating the masses on using cryptos. Here are some roles of exchanges in the crypto space.
- They facilitate the trading of cryptos between individuals.
- They offer support services like crypto education and technical advice.
- They offer different crypto trading options other than P2P trading. For instance, some crypto exchanges like Binance and BitMEX offer crypto derivatives desirable to experienced traders who seek to make more profits.
- They offer secure and trustless crypto transactions. Let’s say a trader wants to liquidate Bitcoins worth over $10M, and they do not know of a trader who wants to take them at the same price; a crypto exchange (CEX) may match the market maker with a taker and conduct the exchange in a trustless way. Also, a DEX could let the Market Maker (the trader who places a sell order) liquidate the coins through its liquidity pool.
- They offer extra security in crypto transactions, and some even offer insurance services for specific trading options.
- They offer innovative methods of earning passively from crypto holdings. Some exchanges like Binance and Uniswap allow users to earn passively by staking their crypto holdings or liquidity mining. Others allow users to earn from Yield Farming.
Introduction to CEXs
A CEX is a crypto exchange managed and governed by a central body. They mostly have a governance structure similar to companies where common titles like CEOs, CFOs, CTOs, and such are dominant. These exchanges are the most common in the crypto space since they were the iteration of exchanges that premiered.
These exchanges differ according to their governance teams but are similar in some aspects. The common attributes of centralized crypto exchanges include:
- Centralized power structure
- Fewer crypto assets
- Regulatory compliant
- AML/KYC protocols compliant
- It supports several trading options
- Have large liquidity
- Asset prices are similar to the market
Some examples of significant CEXs in the crypto space include:
Introduction to DEXs
DEXs are among the latest innovations in the crypto space. They came years after CEXs, with the earliest ones launching in 2017 while most launched in 2020 (the DeFi year). They are tied mainly to DeFi as almost all of their services are based on promoting decentralization in the finance sector. They are characterized by decentralized governance where key decision-making processes are spearheaded by their Decentralized Autonomous Organizations (DAOs).
These exchanges have native tokens that are their utility and governance tokens. However, some DEXs may have different dynamics where the governance token is not the same as the utility token. However, their governance is similar in that the governance tokens are used in the voting process.
Below are some common attributes of crypto DEXs
- They have decentralized governance structures where decision-making is based on consensus.
- They support large amounts of cryptos that are selected by their user base.
- They are hardly regulatory compliant as they fight against centralized inspections
- Most of them, like Uniswap and PancakeSwap, lack AML/KYC details
- They have many ways of passive earning
- Their fees are low, with some like 1inch charging zero fees
- Asset prices vary according to the preset equations of liquidity pools and the available liquidity.
- Assets held on DEXs belong to users since every on-chain wallet has unique and private keys.
Some of the most popular crypto DEXs include:
Introduction to Hybrid Crypto Exchanges (HEXs)
A crypto HEX is a crypto exchange that is a hybrid of a CEX and a DEX. They practice semi-centralized governance to solve the scalability issues that challenge most crypto DEXs. HEXs are characterized by a lack of taker fees and gas fees.
This iteration of crypto exchanges builds on the shortcomings of CEXs and DEXs. In DEXs, users enjoy complete control of their funds and other exchange features. HEXs also try to incorporate this feature. One of the primary goals of HEXs is to solve the high fees that some DEXs and most CEXs have.
Some of the most popular crypto HEXs include
- Qurrex Hybrid Exchange
- Eidoo Hybrid Exhcnage
- Legolas Hybrid exchange
What Are the Benefits of Hybrid Exchanges?
- Addresses shortcomings of both CEXs and DEXs
- Maintains the security of users’ privacy while upholding regulatory compliance
- It gives services that are similar to the crypto market, like prices of assets
- Supports decentralization to a modest level, like users having complete control over their funds
- They perform fast and transparent transactions.
The Differences Between CEXs, HEXs, and DEXs
Below are some significant differences between CEXs, HEXs, and DEXs in the crypto space.
CEXs and HEXs commonly have user interfaces that are straightforward as compared to DEXs. At most times, DEXs have too many features, resulting in convoluted UIs that may be hard to navigate for both new and experienced users.
Crypto CEXs rely on central bodies and individuals with high ranks for governance. These exchanges are managed how these main powers see fit. They also do not focus much on users, which leads to occurrences like bans and delays of transactions. They can also block several nations from accessing their services, as with Binance.com and the US/ Chinese markets.
HEXs are managed partially as DEXs and CEXs. They exhibit a certain level of decentralization and centralization. These exchanges differ according to their leadership and may allow users to engage in given decision-making processes but not others.
DEXs have a hedge in this attribute. They allow users to vote on how they want the exchange to be governed. However, a user must be a part of their DAOs to engage in the governance processes. They are better than CEXs and HEXs in that no one can be blocked from using them or get their accounts banned or suspended.
HEXs and CEX are better than DEXs on this front since they mostly have deeper liquidity. They, therefore, are not subject to overpriced assets and slippages. Slippages happen when an asset is sold at a higher price than listed due to a lack of liquidity.
DEXs lack liquidity since they deal with many assets, including the least known tokens. They try to solve this issue by introducing methods of collecting liquidity like liquidity mining, staking, and yield farming. Others use DEX aggregators. However, they are still a long way from reaching the level of CEXs in terms of liquidity.
CEXs and HEXs use order books where a maker lists an asset for sale at a given price and gets a taker who wishes to buy it at the same price. As a result, the prices of assets stay almost constant in the market.
In DEXs, the price of assets is dictated by the available liquidity and the mathematical equation used to calculate how the price will be. Also, slippages can occur, resulting in assets trading at very different prices from the market.
CEXs have smaller lists of supported assets as they look for the safest assets. Users often do not get all of the assets they want to trade since they are rarely consulted during listing new assets.
HEXs may differ from CEXs in that they ask their users to propose the assets they want to be listed. However, they also have smaller lists than DEXs since their leaders do not have to accept all proposed assets.
On the other hand, DEXs have the edge over both CEXs and HEXs because they have long lists of assets. Others like Uniswap and Pancakeswap allow their users to add their customized assets for trading. Thus, users have unlimited choices to trade with.
Offered Services and Trading Options
CEXs and HEXs have more trading options and better services than DEXs since most of their activities are micro-managed. Therefore, users can access trading options like Derivatives markets which are not common in most DEXs. Also, HEXs and CEXs offer better customer services than DEXs.
Decentralization and Ownership of Assets
When it comes to decentralization, DEXs are the best. They allow a user to dictate how given platforms are governed or will be reshaped. They also allow users to have full custody over their assets, unlike HEXs and CEXs.
HEXs are also a bit better than CEXs in this aspect, although not as good as DEXs. They allow their users to contribute to some decision-making processes even though not all of them. They also allow users to have full custody of their assets, unlike CEXs.
CEXs are managed by bodies that control all primary governance needs. They rarely include their users in decision-making processes, and when they do, it is more of a suggestions session. They also do not offer private keys to the funds held on-chain. Technically, that means the users do not have full ownership of funds held on CEXs, and they may be locked from transactions which could be pretty inconvenient.
CEXs and HEXs are more secure as compared to DEXs. These exchanges vet their partners and apply high-level security measures like 2FA protocols and locking of trading accounts after a password change. They are also the most targeted by cyber attackers; hence must maintain tight security.
DEXs are behind CEXs and HEXs in terms of security. They lack security features like 2FA authentication and are common scam traps and cloning victims. As a result, they are riskier to use than CEXs. Also, if a significant scam happens, authorities cannot intervene.
HEXs and CEXs are more regulatory compliant and even apply the use of AML/KYC protocols to avoid crashing with authorities. They also ensure that they only work where regulators are comfortable with them like Binance does not offer services in China and US due to regulatory issues.
DEXs are worse in terms of regulatory compliance. While it shows that they stick to the aims of cryptos (doing away with governments’ manipulation of finance), the move is very risky. In case of scam traps and other fraudulent activities that lead to losses,
Which Is Better, a CEX, HEX, or a DEX?
CEXs, HEXs, and DEXs offer different services that users so dearly need in the crypto space and fail in others. However, it is not satisfying to lack some main services, like allowing users to do what they desire with their funds. Also, the security of trades is essential for crypto users.
When the functionality of crypto exchanges is considered, DEXs have an edge against CEX and HEXs. Although HEXs are built to solve issues surrounding DEXs and CEXs, they still fall short since, being led by centralized bodies, they are subject to changes without the consent of their users. HEXs are similar to trusted third parties (TTP) that Satoshi Nakamoto wanted to eradicate as per his BTC Whitepaper.
However, it is best to be cautious while using DEXs. Some have been cloned before and use the most popular ones to avoid slippages and delayed transactions due to limited liquidities. Also, explore different types of exchanges rather than one since they all have different features that make them suitable for given uses and not others.
Crypto exchanges function like marketplaces for digital assets. They are among the essential pillars of the crypto space. Without them, it would be hard to carry out activities like pooling liquidity for large transactions, which means that crypto usage would be more limited.
They also allow users to earn passively from their crypto holdings through staking, yield farming, liquidity mining, and lotteries. However, these platforms differ according to their governance. There are decentralized ones, centralized ones, and hybrid types. They all offer different services, with some being unique to each type.
Therefore, crypto enthusiasts ought to research them. The research should be focused on identifying the key features of each type of exchange and the best exchange to use. For instance, in case a user wants to earn rewards from liquidity mining, they cannot go to search it on Binance; instead, they should look for DEXs like Uniswap.
Additionally, it is advisable to invest cautiously in the crypto space since it comes with risks. For example, HEXs can change their governance styles anytime, CEXs like MT GOX were brought down by cyber-attacks, and DEXs like 1inch have been cloned. All these occurrences can cause inconveniences. Also, some digital assets are too speculative and could crash in price leading to huge losses.