Centralized order books, decentralized protocols, automated market makers, and routing.
By the end, you should be able to
- Compare CEX and DEX trust assumptions.
- Explain an AMM at a conceptual level.
- Identify custody, contract, and liquidity questions.
Two venues, different control points
Neither model removes risk; it relocates it.
Centralized venues operate accounts and infrastructure
A custodial centralized exchange typically holds customer assets, maintains internal account records, and operates an order-matching system. Broker-style and non-custodial venues can differ. Users take counterparty, custody, operational, and jurisdictional risk when the venue is custodial.
DEXs settle through smart contracts
A decentralized exchange usually lets users submit transactions from their wallets to smart contracts. This changes the trust model but introduces contract, oracle, network, approval, and transaction-ordering risks.
AMMs price from pool state
An automated market maker uses a formula and pooled assets rather than a traditional order book. A trade changes pool balances and therefore the next available price. Routers may split trades across pools.
What this does not tell you
- “Decentralized” is not a binary property; interfaces, governance, and keys may remain concentrated.
- Self-custody does not remove smart-contract or network risk.
- Reported CEX and DEX volumes are not directly interchangeable.
Compare venue assumptions
Use the same hypothetical asset and order across two venue types.
- List who holds keys before execution.
- List how price is formed and settlement occurs.
- Record one liquidity risk, one operational risk, and one recovery limitation for each.
Check your understanding
1. How does an AMM commonly form prices?
2. What risk is prominent on a custodial exchange?
3. Does using a DEX remove all intermediaries and risks?