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CEX vs. DEX: Or How I Learned to Stop Fearing Non-Custodial Wallets

Roberta Fuccetti
January 15, 2022

CEX vs. DEX: Or How I Learned to Stop Fearing Non-Custodial Wallets

Hello friends. Let’s take a quick trip back in time: The year is 2013 and things are looking up in the crypto space! BTC hit an all time high of $1242, wallet holders had grown massively, and one of the largest Centralized Exchanges for crypto (CEX) in the world was handling approximately 70% of all BTC transactions at the time.

The name of this CEX was Mt. Gox.

Yet, by February of 2014 Mt. Gox had suspended trading, closed its website, and filed for bankruptcy - beginning liquidation proceedings in April of that same year. Over 850,000 BTC belonging to customers and the company were stolen.

Since the Mt. Gox hack rocked the crypto world back in 2013, there has been an ever present mantra in the crypto community that I’d like to dive into a bit with this article, and that mantra is this:

                                                   Not your keys? Not your crypto.

But what does that mean exactly? Let’s dive into this a bit more, so we can get a fuller picture.

Part One: Custodial vs. Non-Custodial Wallets

In the crypto world there are two ways to hold your crypto: In a Custodial or a Non-Custodial wallet.

Custodial Wallet:

This is a wallet where you send your crypto to, but you do not control/hold the keys to. Custodial Wallets are the wallet method for CEXs and are the responsibility of the CEX that holds them.

Non-Custodial Wallet:

This is a wallet where you send your crypto to, but you control the private keys and thus have full responsibility over your wallet.

So why should you care, whether you hold the keys to your crypto wallet or not? 

Simply put, you should care because crypto wallets in themselves do not technically “hold” any crypto (at least not as far as local software is concerned) - instead, they act as keys to access crypto on the blockchain associated with the wallet address. 

In other words, if you choose to hold your crypto in a custodial wallet and you lose access to your account or your crypto gets drained (like what happened with Mt. Gox), there’s very little you can do.

Whereas,  if you hold your crypto in a non-custodial wallet and practice proper crypto security, you can recover your crypto regardless of what happens to the physical device the wallet is on (so long as you have your seedphrase i.e., your “cryptokeys”).

Part Two: CEXs vs. DEXs

Alright! So now that we know a little bit more about how wallets function and the differences between custodial and non-custodial wallets, let’s talk a bit more about CEXs vs. DEXs. First and foremost, what exactly are these?

Centralized Exchange (CEX):

This represents a crypto exchange operated by a central company that uses custodial wallets.

Decentralized Exchange (DEX):

This represents a decentralized crypto exchange where trading is done via peer-to-peer or using collectively funded liquidity pools (i.e., pools of two exchangeable cryptocurrencies).

Now, there are some advantages and disadvantages with both CEXs and DEXs, so let’s talk a bit about those:

Typically, due to the advantages and disadvantages tabled above, experienced crypto traders will often opt to use CEXs as “Fiat Gates” (i.e., ways to convert your USD into crypto). From there, crypto traders and hodlers will send that crypto to hardware and software wallets that they control the seedphrases for.

For example, let’s say you wanted to invest in Solana’s premier DAO meme coin $WOOF, there would be two ways to achieve this:

  • Buy the $WOOF cryptocurrency on Bitrue (CEX) and allow them to manage your funds.
  • Buy SOL from a CEX (like Coinbase, Kraken, Kucoin, or crypto.com).
  • Then send that SOL to a proper Solana wallet (like Phantom, Solflare, or Sollet).
  • Connect to a proper Solana DEX (like Orca.so, raydium.io, or dex.woofsolana.io) and swap your SOL for $WOOF.

If you were to purchase $WOOF on a CEX you would be subject to all the risks detailed above and you would have no access to the DAO (since the CEX manages your $WOOF). 

If you were to swap for $WOOF on a DEX, not only would you now be in control of your coins, but you would also be able to verify for $WOOF DAO access (allowing you to vote and help create project proposals).

Part Three: Final Thoughts and Additional Resources

At the end of the day, it is a good idea to never store all your crypto in one place in order to avoid a “all the eggs in one basket” scenario, but it cannot be understated how dangerous it can be to leave your crypto on a CEX for extended periods of time; Mt. Gox is only one of many CEXs that have hurt their users over the years.

Thus, as the crypto world moves forward into this bright new Decentralized Financial future, it would be wise for us to remember the mistakes of the past so that we can better control our financial futures.

If you’re interested in further educational content like this, please feel free to check out the $WOOF Discord where we periodically post educational materials and discuss the crypto space.

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