As unpopular as this opinion may be, you aren’t financially woke just because you bought crypto. This is because buying on a centralized exchange is no different from using a bank.
We get it. A lot of people in the crypto industry get it. Centralized exchanges (CEX), in general, provide the easiest way to obtain cryptocurrency, with the least amount of hassle, and typically give a lot of support to customers.
This can be an essential set of features, especially for newcomers to crypto bewildered by the sheer amount of options facing them when getting their hands on their first crypto assets. However, this does make their model to the financial institutions we already have.
How a CEX is like a bank
Here’s a few ways a CEX is similar to a bank:
- Most intuitive user interfaces look familiar to users who already use traditional financial applications.
- It’s an easy way to allow seamless buying of crypto with a bank account or credit card (you might call this a fiat on/off ramp in crypto).
- There is a company behind it that users can look up and do due diligence on, maybe even a CEO they can believe in.
- There is a customer support department with people users can turn to for help.
- It has deep liquidity — it’s highly unlikely that new users have an order the CEX can’t fulfill.
Where a DEX differs
The antithesis to CEXs is decentralized exchanges (DEXs). These are crypto exchanges with no intermediary between the buyer and the seller, using blockchain technology and smart contracts to settle trades and transactions automatically.
However, typically, DEXs:
- Don’t have the friendliest user interfaces.
- Aren’t run by a company.
- Don’t have customer support.
- Are lacking deep liquidity.
This makes it understabale why CEXs continue to be so popular and why newcomers tend to buy their first crypto from them. Perhaps, this may very well continue to be the case for a long time to come, as people will always want some sort of assurance and comfort when trying something new.
However, there are other aspects that people fail to consider when choosing to buy crypto from a CEX.
Buying crypto doesn’t make you a financial revolutionary
Since crypto isn’t only money but also a representation of economic freedom, it’s tempting to think of yourself as a freedom fighter for the new financial system just by getting yourself a bit of crypto.
However, buying crypto from a CEX means you’re not subscribing to crypto philosophy or the logic of decentralized finance (DeFi).
Almost every aspect of a CEX mirrors a bank. Choosing to engage the services of a CEX is no different from using a bank and supporting their cause. Therefore, strengthening their grip on the global financial system.
Arguing for a DEX
Some may not have noticed it, but the best prices (either buy or sell) tend to be on P2P platforms or DEXs. With a CEX, customers still get prices close to a global average but ar a slightly higher price due to the difference or the spread.
Simply put, to pay for the costs of maintaining the platform and employees, they charge customers more for their buys and give them less for their sells.
Just like in real life, when exchanging money, customers get better rates at independent moneychangers than at banks. The reasons are the same. Banks have expensive infrastructure and employee salaries to pay.
The other way banks and CEXs earn revenue is by charging fees on every transaction customers make. Every sell or buy usually has a fixed percentage of the trade charged as a fee. Every withdrawal of crypto made from a CEX also is subject to a withdrawal fee — just like a bank.
CEXs will tell customers it’s to pay miner fees, but since the withdrawals happen in batches with others, it’s easy to see how little of the fee is made out to miners.
Banks and CEXs assume complete control over the funds and accounts. For example, they will generally say they process transactions within a given period or during office hours. Customers can request a withdrawal and wait for hours, if not days, for them to process it. As such, the customers have no say over when it will happen.
Another example is during periods of high network congestion. Customers can’t control how much CEXs will pay to miners for the transactions. They just have to sit and hope they pay enough.
Customers can request to close their account, but they have no way of knowing if the CEX purged the personal information from their databases. Customers have no way of knowing anything they tell them is true.
Are there thousands of traders on their platforms? Or just bots. Are there vast volumes of trades and deep order books? Or is that all fake data fed to the system? Do they have reserves backing their balances? Bitfinex’s Tether settled with US regulators for $18.5 million after it was caught lying about reserves.
This is perhaps the most crucial point that crypto buyers on CEXs don’t realize. They don’t own anything but an account on the CEX.
Using a DEX is a statement for crypto
More than just money, crypto is a philosophy of financial freedom. However, with CEXs customers often lose out on some of these freedoms and control. It is only DEXs that offer:
- The freedom to specify the price that you want to purchase their assets. Don’t like the price offered? Offer your own on DEXs.
- The freedom to choose fees or how much to pay to the network validators to verify and validate transactions. Want it urgently? Then pay a premium. Willing to wait? Then pay a lower gas fee.
- The freedom to control the way the money is used. Want to delete the account? Well, customers don’t even need one with truly decentralized DEXs.
- The freedom of ownership. With DEXs, you are always in control of your funds with non-custodial interfaces. You never need to sign over your crypto. They never leave your wallet if you don’t stake them or spend them or save them or swap them.
Crypto and DeFi are opening so many new opportunities for people every day, giving more and more access to finance to those who would ordinarily be turned away by banks and by CEXs.
It’s perfectly all right to use a CEX. However, if you’re looking for more control over your crypto finances, then a DEX may be a better option.