A centralized crypto exchange (CEX) is a company that offers a variety of services, including a crypto trading platform (for buy and sell transactions), account services (account funding and withdrawal), and customer support.
Centralized exchanges continue to be the most popular way to buy and sell cryptocurrency.
They are appealing to many cryptocurrency users because they are thought to be more convenient and easier to use than a decentralized exchange (DEX).
What is a CEX (Centralized Crypto Exchange)?
A centralized exchange (CEX) enables anyone with an internet connection to find and trade crypto assets.
It is owned and operated by a private company, and participation requires users to sign up and create an account. CEXs facilitate crypto asset transactions between buyers and sellers by offering an online trading platform with an order book (a collection of buy and sell orders posted by individual traders).
A CEX aggregates orders placed in the order book by its users and then matches and executes the corresponding buy and sell orders using special software. Binance, Coinbase, Bybit, Gemini, Kraken, and Kucoin are examples of centralized exchanges.
How does a CEX operate as a cryptocurrency exchange?
Matching Orders
Buyers and sellers transact with one another on a cryptocurrency exchange. This means you purchase cryptocurrency from another exchange user, rather than the exchange itself.
The exchange itself provides a location for people who want to buy cryptocurrency as well as people who want to sell cryptocurrency. It connects buyers and sellers.
If a buyer wants to buy bitcoin (BTC) for $20,000 and a seller wants to sell bitcoin for $20,000, the exchange will match their orders.
Counterparty Clearing
In addition, the exchange serves as a central clearing counterparty.
This is just a fancy way of saying that all matched orders appear to be against the exchange as a whole rather than between individual users. Because neither the buyer nor the seller knows who the other is, both parties benefit from anonymity.
Furthermore, as the central clearing counterparty, the CEX manages the entire transaction, ensuring that all obligations between buyer and seller are met and the transaction is completed.
For example, if you paid $20,000 for one bitcoin (BTC), the exchange ensures that you have $20,000 (USD), and that USD is transferred to the seller’s account, while the newly purchased BTC is transferred to your account.
You cannot simply take the bitcoin and vanish, and the seller cannot simply take your US dollars and vanish (and keep their bitcoin).
Custodian
The exchange also serves as a custodian for any cash or cryptocurrency in your account.
Some exchanges accept fiat currencies such as US dollars or euros, while others only accept cryptocurrencies such as bitcoin (BTC) or ether (ETH).
Once deposited, fiat or cryptocurrency are in the custody of the exchange. This means you’re now relying on the exchange to keep your funds safe in the same way you’d rely on a bank’s vault to keep your money safe.
Now that you know what a centralized crypto exchange (CEX) is, let’s talk about their benefits and drawbacks.
The Benefits of CEX
1. Convenience
Centralized exchanges provide novice investors with a familiar and friendly environment for trading and investing in cryptocurrencies. Users of centralized exchanges can log into their accounts, view their account balances, and make transactions through applications and websites, as opposed to crypto wallets and peer-to-peer transactions, which can be complex.
2. Reliable
When it comes to transactions and trading, centralized exchanges provide an extra layer of security and dependability. Centralized exchanges provide greater comfort by facilitating the transaction through a developed, centralized platform.
3. Leverage
Another advantage of certain CEXs is the ability to leverage your investments by borrowing money from the exchange, a practice known as margin trading. It allows investors to earn higher returns, but it also magnifies losses.
Disadvantages of Centralized Cryptocurrency Exchanges
1. The danger of hacking
Companies that operate centralized exchanges are responsible for their customers’ holdings. Large exchanges typically hold billions of dollars in bitcoin, making them an attractive target for hackers and theft.
Mt.Gox, which was once the world’s largest cryptocurrency exchange company before reporting the theft of 850,000 bitcoins, is an example of such an incident.
2. Transaction charges
In contrast to peer-to-peer transactions, centralized exchanges frequently charge high transaction fees for their services and convenience, which can be especially exorbitant when trading in large amounts.
3. Digital asset custody and the risk of fraud
Finally, and most importantly, rather than allowing you to store your private keys on your own digital wallet, most CEXs will hold your digital asset as a custodian in their own digital wallet. While it is more convenient to trade, there are some disadvantages, including the risk of the centralized cryptocurrency exchange failing and fraud.
Recent examples include the failure of the $50 billion algorithmic stablecoin TerraUSD and its sister token Luna, as well as the bankruptcies of hedge fund Three Arrows Capital, lender Celsius Network, broker Voyager Digital, and FTX and Alameda Research.
The 10 Top CEX, Ranked by Volume (as of Nov. 2022)
Top Centralized Exchanges
The following are the top centralized cryptocurrency exchanges, according to traffic, liquidity, and trading volumes.
