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CEX Characteristics
Custody model: Exchange holds user funds. Users deposit to exchange wallets. Custodial — triggers FinCEN MSB registration and state money transmitter licensing.
Trading mechanism: Internal order book. Matching engine processes orders without on-chain transaction for every match — only settlement moves funds on-chain. This enables sub-millisecond order matching and complex order types (limit, stop-limit, OCO).
User experience: Familiar (similar to Robinhood or brokerage). Account creation with KYC. Password recovery. Fiat on-ramp via ACH/wire. No wallet management required.
Regulatory complexity: High. MSB registration, AML program, state MTLs, potential SEC registration for securities trading.
Revenue model: Trading fees (0.1–0.5%), withdrawal fees, listing fees, margin interest.
Development cost: $220,000–$620,000+.
DEX Characteristics
Custody model: Non-custodial. Users trade directly from their wallets. No funds held by the protocol. Regulatory classification: unclear but generally more favorable than CEX.
Trading mechanism: Smart contract (AMM or on-chain order book). All trades settle on-chain — atomic, transparent, immutable.
User experience: Requires crypto wallet (MetaMask, WalletConnect). No account creation. No fiat on-ramp (by default). Slightly higher friction for new users.
Regulatory complexity: Lower (but not zero — SEC and FinCEN have both taken positions on DEX regulation).
Revenue model: Protocol fees (0.01–0.3%), liquidity provider revenue share.
Development cost: $90,000–$290,000.
Decision Framework
Build CEX when: Target market includes non-crypto users who need fiat on-ramp and familiar UX. Complex order types (stop-loss, margin) are required. Institutional clients require custodial service.
Build DEX when: Target market is crypto-native (has wallets). Censorship resistance is a value proposition. Operating in a jurisdiction where CEX licensing is prohibitively complex. Protocol fee revenue (without custody liability) is the preferred business model.