Why Do Centralized Exchanges (CEX) Often Have Tighter Spreads for Altcoins than Decentralized Exchanges (DEX)?
CEXs use a traditional, high-speed, off-chain order book model that attracts professional, competitive market makers who actively quote tight spreads to capture flow. DEXs, however, primarily use Automated Market Makers (AMM) and liquidity pools.
DEX transactions incur variable, on-chain gas fees and are prone to higher slippage due to the AMM formula, making the effective cost and spread generally wider than on a CEX.
Glossar
Centralized Exchanges
Exchange ⎊ Centralized exchanges (CEXs) represent a critical infrastructure within cryptocurrency markets, facilitating order matching and settlement for a diverse range of digital assets, including options and derivatives.
Tight Spreads
Execution ⎊ Tight spreads in cryptocurrency derivatives, particularly options, represent the minimized differential between the bid and ask prices for a given contract.
Decentralized Exchanges
Access ⎊ These platforms offer permissionless entry to cryptocurrency and tokenized asset markets, democratizing capital deployment into novel financial structures.
Automated Market Makers
Architecture ⎊ Automated Market Makers represent a fundamental shift in price discovery, moving away from traditional order book models towards algorithmic execution predicated on mathematical formulas.
Tighter Spreads
Liquidity ⎊ Tighter spreads directly correlate with increased market liquidity, facilitating efficient price discovery and reduced transaction costs for cryptocurrency derivatives and options.
Order Book Model
Mechanism ⎊ The order book model, central to cryptocurrency, options, and derivative exchanges, functions as a transparent record of buy and sell orders for a specific asset, displaying price and quantity.