What Is Centralized Exchange (CEX)?
Centralized exchanges, also known as CEXs, are organizations that facilitate the buying and selling of cryptos on a large scale, somewhat similar to brokerages - i.e. stock market exchanges. Think of them as cryptocurrency marketplaces, which unlike DEXs (decentralized exchanges) have a central authority managing and overseeing operations. There is much more to talk about regarding CEXs, like the way they operate, their differences from DEXs, and their pros & cons. Continue reading to learn more.
Summary of Important Points
- Centralized exchanges (CEXs) are cryptocurrency marketplaces, allowing for massive buying and selling of cryptocurrency, similar to stockbrokers.
- CEXs offer almost guaranteed liquidity, allowing you to exchange your crypto for fiat currency or convert your assets from one crypto to another.
- Unlike DEXs, CEXs are centralized - meaning that they have an “authority” on top. This means that they usually have slightly higher fees for buying, selling, and trading, but are also more secure.
How Does A Centralized Exchange Work?
Centralized exchanges are exchange platforms that are almost always owned by a centralized organization, acting as an intermediary (middle man) between the buyers, sellers, and traders of cryptocurrencies. A defining feature of centralized exchanges is that they are custodial, meaning that they physically own all of their users’ wallet addresses. This is not the case for DEXs, where its users have the private keys of their addresses to themselves.
Essentially, centralized exchanges are like banks for cryptocurrency. Many in the crypto space are against CEXs, saying that they go against the entire point of blockchain technology - decentralization, autonomy, and anonymity. While this is true to some extent, CEXs are a lot more secure than DEXs, and they almost completely eliminate the chance of scams, lost wallet keys, and incorrectly handled transactions.
Exchanges that are custodial (essentially all CEXs) are usually a better option for those who have a beginner or intermediate knowledge of crypto. CEXs manage the private and public keys of your wallet without you having to worry about them. Properly managing these keys (specifically, the private key) should be your top concern as an owner of crypto, and this is easily solved with crypto asset custody by CEXs.
Some of the most popular CEX examples are:
Centralized vs. Decentralized Exchanges
As we briefly touched on above, the main difference between CEXs and DEXs is the absence of a middle man (intermediary). All transactions performed at a DEX are peer-to-peer, being directly transferred from one wallet address to another. On the other hand, at a CEX, the assets get into an escrow wallet, and the transaction is later completed via smart contracts and swaps. This is the case for all exchanges on our CEX list above.
Another big difference between CEXs and DEXs is the ability to purchase crypto with fiat. Since CEXs are managed by a centralized organization, you can send the organization your fiat cash (usually in a multitude of fiat currencies) and receive the crypto directly in your wallet. This is not the case with DEXs, as they don’t have an organization behind them to handle the fiat cash. Instead, you can work only with cryptos, sending and receiving assets via the blockchain.
Advantages of Centralized Exchange
Significantly bigger volume and liquidity
Since CEXs are a lot more popular than DEXs, it’s expected that they’ll have a lot more users and a higher exchange volume than DEXs. This means that you can sell your crypto at any moment, or exchange one crypto for another with minimal fees.
A better user experience
Centralized exchanges have an organization operating them behind the scenes. The central organization is interested in high user satisfaction, which is why they do their best to make the user experience seamless. This includes having an intuitive user interface, offering good customer support, and providing educational materials for beginners.
Increased user security
As we mentioned briefly above, CEXs do the hard work for you - they handle your private and public keys without you having to worry about them. This makes the possibility of you losing your crypto at a CEX minimal to none, as they’ll never lose it or spend it without your permission.
Drawbacks of Centralized Exchange
Strict regulations in place
The company operating the centralized exchange has to be licensed by the government, which is why they have to follow strict government law. This includes performing a KYC (Know Your Customer) procedure on every new account, which might be a deal-breaker if your priority is anonymity. At its core, this goes against the key principles of DeFi and the way it's revolutionizing TradFi (traditional finance).
Less diversity & smaller options for cryptos
For a cryptocurrency to get listed at a CEX, it must pass very strict criteria, and if the crypto fails to satisfy any criteria, it will get rejected. On the other hand, DEXs have significantly more altcoins on offer (the average estimate is around 3,000 more).
A small risk of losing all of your money due to the potential of bankruptcy
Although the chances are incredibly small, there’s always a chance that the organization behind a CEX goes bankrupt. We briefly described above that all crypto wallets that users have at a CEX are not “theirs” - rather, they belong to the CEX and users are “borrowing” them. If the company behind the CEX goes bankrupt and closes down, all of their addresses might become obsolete or inaccessible.
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