Centralised vs Decentralised Exchanges

How each one works

A centralised exchange takes custody of your funds and matches orders on its own internal systems. Your balance is a database entry; trades do not touch a blockchain until you withdraw.

A decentralised exchange executes trades through smart contracts on-chain. You keep custody throughout, connecting a wallet and signing each transaction. Most use automated market makers — liquidity pools with a pricing formula — rather than an order book.

The honest comparison

	Centralised	Decentralised
Custody	Exchange holds funds	You hold funds
Fiat on-ramp	Yes — INR, USD and others	Generally no
Speed	Instant, off-chain matching	Block-time, plus gas
Liquidity on major pairs	Deeper	Thinner outside top pools
New and small tokens	Listed selectively	Anything can be listed
Account recovery	Possible	None — lost keys are final
KYC	Required	Typically none
Counterparty risk	Platform solvency	Smart contract risk

What each is actually good for

CEXs are better for getting in and out of fiat, for trading major pairs with tight spreads, for anything requiring support, and — in India specifically — for automatic TDS handling that keeps your tax record straight.

DEXs are better for tokens too new or too small to be listed anywhere, for keeping custody, and for interacting with on-chain applications directly.

The risks are different in kind

On a CEX, the risk is the platform: insolvency, freezes, hacks of the platform's own reserves. Diligence means looking at proof of reserves, regulatory registration and operating history.

On a DEX, the risk is code and the tokens themselves: a contract bug, a malicious token that cannot be sold, or a pool drained by its own creator. Diligence means checking audits and contract addresses — and accepting that a mistake has no appeal.

Costs you should compare properly

On a CEX: maker and taker fees, withdrawal fees, and the spread.
On a DEX: the pool fee, network gas, and slippage — which on a thin pool is usually the largest of the three.

Slippage is the cost people underestimate. On a shallow pool, a moderately sized order moves the price against you significantly, and that cost does not appear as a fee line anywhere.

For Indian users specifically

Tax treatment does not change: a swap on a DEX is a transfer of a VDA and is taxable under Section 115BBH exactly as it would be on an exchange. What changes is that nobody deducts TDS and nobody produces a statement — the record is the chain, and reconstructing it at filing time is entirely on you.

How to assess a centralised exchange

If you are trusting a platform with custody, the diligence is about the platform rather than the market.

Regulatory registration — in India, FIU-IND registration; elsewhere, the local equivalent.
Proof of reserves — whether the exchange publishes verifiable evidence it holds customer assets, and whether that evidence covers liabilities as well as assets.
Operating history — how it behaved during previous market stress, particularly around withdrawals.
Withdrawal behaviour — test with a small withdrawal before committing size. Delays are the earliest visible symptom of trouble.
Insurance and segregation — what is actually covered, as opposed to what is implied.

The exchange reviews on this site apply these criteria consistently, and the methodology page sets out how each is weighted.

How to assess a decentralised exchange

Here the diligence is about code and tokens rather than a company.

Verify the contract address from an authoritative source. Fake front-ends and imitation tokens are common, and a correct-looking interface proves nothing.
Check the pool's depth before trading — thin liquidity means slippage that can exceed every other cost combined.
Look at whether the token can be sold. Some contracts permit buying and block selling. Test with a small amount first.
Check audit status, while remembering an audit is a point-in-time review, not a guarantee.
Set slippage tolerance deliberately. A high tolerance invites sandwich attacks, where a bot trades around your transaction at your expense.

Hybrid approaches

In practice most people use both: a centralised exchange for fiat conversion and major pairs, then self-custody for holdings, and a decentralised exchange only when a token is unavailable elsewhere.

That division keeps fiat access and support where they are useful, while limiting how much value sits with any one platform. The mistake to avoid is drift — leaving everything on an exchange because moving it never felt urgent.