To buy or trade crypto, you need an exchange. There are two fundamentally different types: centralised exchanges that work like a traditional brokerage, and decentralised exchanges that run on smart contracts with no company behind them. Each solves the same problem differently — and the trade-offs between them cut to the heart of what crypto is trying to be.
A centralised exchange is a company that holds your crypto on your behalf and matches buyers with sellers. Coinbase, Binance, Kraken, and Gemini are the largest. They're convenient — familiar interface, customer support, fiat on-ramps (you can deposit pounds directly), and legal protections. In the UK, a CEX must be registered with the FCA for crypto activities.
The catch: custodial risk. When you hold crypto on a CEX, you don't own the private keys — the exchange does. You have an IOU. If the exchange is hacked, goes bankrupt, or freezes withdrawals, your funds are at risk. FTX had approximately $8 billion of customer funds when it filed for bankruptcy in November 2022 — customers eventually received partial recoveries years later through the bankruptcy process.
Every regulated CEX requires KYC verification — you must provide a government ID, proof of address, and sometimes a selfie. This ties your real identity to your crypto activity, creating a regulatory trail. It's required by anti-money-laundering (AML) laws in virtually every major jurisdiction. Some users see this as incompatible with crypto's privacy ethos; most institutional users accept it as the price of access to regulated venues.
A decentralised exchange is a smart contract on a blockchain — no company, no custody, no KYC. You connect your own wallet and trade directly from it. Uniswap, Curve, and dYdX are the largest. Your private keys never leave your control. No counterparty risk. But also no customer support, no fiat on-ramp, higher technical complexity, and smart contract risk.
Traditional exchanges use an order book — buyers and sellers post orders that get matched. DEXs use a different model called an Automated Market Maker. Liquidity providers deposit pairs of tokens into a smart contract "pool." The pool uses a mathematical formula (most commonly x × y = k, where x and y are the quantities of each token) to automatically set prices based on supply and demand. No order book needed.
Liquidity providers earn a share of trading fees but face impermanent loss — if token prices diverge significantly from when they deposited, they'd have been better off just holding the tokens. The "loss" is only realised if they withdraw, but it's a real risk that erodes yield.
A pool holds 100 ETH and 200,000 USDC. Constant product: 100 × 200,000 = 20,000,000.
Someone buys 10 ETH from the pool. Now: 90 ETH must hold the constant, so USDC rises to 222,222. They paid ~22,222 USDC for 10 ETH — the price per ETH was ~2,222.
Larger trades create more "slippage" — the price moves against you as you trade. Deep liquidity pools have less slippage.
Which to use when: CEXs for buying crypto with fiat, for large liquid assets, for simplicity. DEXs for tokens only available on-chain, for DeFi interactions, for privacy (no KYC on most DEXs), and when self-custody is the priority. Most experienced crypto users use both — CEXs as fiat on-ramps, DEXs for on-chain activity.
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