October 2022 saw the most DeFi exploits to date (hacks where the attackers exploit a vulnerability in a system). Along with the increasing DeFi hacks, more and more crypto users have to worry about the benefits of centralized versus decentralized exchanges. But what are the differences between these two types of crypto exchanges?
Many members of the crypto community believe that DeFi will be the future of finance. However, the rise in DeFi hacks shows why decentralized exchanges still have a long way to go before it truly hits the mainstream.
CEX vs DEX: A Comparison
CEX stands for Centralized Exchange, while DEX stands for Decentralized Exchanges.
Crypto beginners mostly prefer a CEX. The user interface is better designed and easier to use in most cases. Using a DEX, on the other hand, can get quite complicated. That’s how some DEX users complainedcrypto exchanges could not use at all because of the user interface.
There is a popular saying in the DeFi space: “Not your keys, not your coins”. With a centralized exchange, the private keys of the coins are not stored by the user, but by the exchange. However, users can access their coins to trade or store the coins themselves by transferring them to a decentralized wallet.
Since a CEX stores all users’ assets, it offers relatively more liquidity. DEXs, on the other hand, use algorithms to match buyers and sellers, eliminating the need for middlemen.
With a DEX, users retain control of their crypto assets while holding them themselves. However, the users themselves are also responsible for storing and managing their private keys. A user can no longer access their funds if the private keys are compromised or lost. Since there is no central entity behind a DEX, no one can help a user recover their wealth if they no longer have access to their private keys.
More and more DeFi users are switching to CEXs
A Metamask user recently reported on LinkedIn how his ETH balance disappeared from his wallet despite being careful to keep his seed set “physical” on paper. Such incidents and almost weekly reports of DeFi hacks made users wonder, whether decentralization is just an excuse for service providersto abdicate responsibility.
What vulnerabilities do hackers use to hijack decentralized wallets? Victims of DeFi hacks wonder who should be held responsible if their money is stolen despite properly storing the private key. The crypto community seems to think sothat it is still too early to use decentralized exchanges on a large scale. MCurrently, more and more DeFi users are moving their funds to CEXs for security reasons. Many are hoping for the next bull cycle to solve these problems.
Is money safe on a centralized crypto exchange?
Hackers aren’t just targeting DEXs. Mt. Gox, a centralized Japanese exchange that processed over 70% of all bitcoin transactions worldwide, is a classic example. After the attackers stole about 850,000 bitcoin, the exchange suspended trading and other services and took the website offline.
According to a statistic from Chainalysis however, the vast majority of hacks target DeFi protocols. However, a hack is not the only way a user can lose their money. Even in 2022, crypto platforms like Voyager and Vauld still had to suspend withdrawals and deposits and file for bankruptcy. The users of these platforms no longer have access to their funds.
It will probably take longer before the decision to use a DEX is as easy as using a CEX. In an ideal world, both options should be good choices.
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