Binance, Coinbase, Huobi, Bitfinex, KuCoin operate similar to traditional stock exchanges. They have taken a ready-made algorithm that worked many years before crypto and transferred it to digital assets.
Centralized exchanges are governed by specific legal entities that are responsible for the operation of the trading floor, preservation of users’ funds and compliance with laws.
This is why the management of centralized exchanges has access to customer funds, and why there was a capital outflow from CEX in 2022 amid the bankruptcy of FTX. The exchange administration was suspected of using customer assets, which led to fears of crypto asset loss among crypto activists and their withdrawal to cold and hot wallets.
If necessary, the management of a centralized exchange can block an individual user, a specific transaction, or an entire line of business – such as depositing or withdrawing funds. In addition, every new user who registers on CEX must undergo a verification of identity (KYC) procedure.
In turn, decentralized exchanges are not an intermediary in transactions, they do not store funds and personal data of their users. Customer identification is mostly done through blockchain addresses and non-custodial wallets, which are connected to the site via an app. Trades and other transactions on DEX are done via smart contracts.
Many decentralized exchanges have no governance. Key decisions are made by the community of management token holders by voting through the DAO. However, DEX often has a key developer who creates and develops the smart contracts or program protocol. The source code of the key components remains open.