What Is a Centralized Exchange (CEX)?
If you've been following the crypto space for a while, you've probably come across the phrase “CEX.” CEX, also known as Centralized Exchange, refers to platforms that enable the purchase and sale of cryptocurrencies for fiat currencies such as the US dollar or between digital assets. They serve as trustworthy intermediates in transactions and frequently behave as custodians.
The term may be slightly complicated for newbies and enthusiasts unfamiliar with cryptocurrencies, but this article is all you require to understand more about centralized exchange. Continue reading to find out more!
More on Centralized Exchanges
The best centralized cryptocurrency exchanges support all aspects of the digital asset trading experience, including security, accurate market pricing, legal compliance, user protection, and exposure to a wide variety of digital assets. Centralized exchanges handle over 99 percent of cryptocurrency transactions. Some of the most popular and frequently used centralized cryptocurrency exchanges are Binance, Coinbase, and Gemini.
Benefits of Centralized Exchanges
1. Fiat On-Ramps
Centralized exchanges often provide fiat on-ramp options, allowing users to purchase cryptocurrencies directly with traditional fiat currencies. Fiat on-ramps on centralized exchanges refer to the ability for users to convert their traditional fiat currencies, such as the US dollar, euro, or any other supported local currency, directly into cryptocurrencies. This feature simplifies the process for individuals who are new to crypto and prefer to use their local currency to enter the market. This streamlines the process and eliminates additional steps, making it easier for newcomers to get started with cryptocurrencies.
2. High Liquidity
Liquidity is the capacity of an asset to be bought without producing a substantial price fluctuation and with a minimal decline in value. Typically, the liquidity at centralized cryptocurrency exchanges is significantly higher as compared to liquidity at decentralized cryptocurrency exchanges. Liquidity is crucial for a multitude of considerations, including the fact that it reduces the exchange's susceptibility to market manipulation. Individuals attempting to influence the prices of cryptocurrencies by submitting fraudulent orders will have far more difficulty executing it on an exchange with high liquidity than on an exchange with low liquidity.
3. Fast Transaction Speed
One of the biggest reasons why centralized cryptocurrency exchanges are so attractive to traders is their speed. Centralized exchanges are more efficient as compared to decentralized exchanges. Rapid transaction speed on centralized exchanges improves user experiences and allows for complicated trade types. Market order transactions are often completed immediately. The funds in your exchange wallet will also be converted to digital assets very promptly. Based on estimates, a centralized cryptocurrency exchange completes orders in just 10 milliseconds, whereas a centralized cryptocurrency exchange needs at least 15 seconds to verify and complete the order.
4. Regulations
Compliance with regulations can provide a level of trust and accountability for users. Centralized exchanges are more likely to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, which can help prevent illicit activities and enhance the overall security of the platform. They also adhere to investor protection procedures and provide customers with risk warnings with regard to the irreversible nature of transactions. This fosters trust among users, allowing them to utilize the platform with confidence. Governments and authorities, on the other hand, have limited control over decentralized exchanges.
Drawbacks of Centralized Exchange
1. Transaction Fees
Centralized cryptocurrency exchanges typically charge hefty transaction fees, which can be particularly exorbitant when transacting in huge sums. For trading fees, centralized exchanges normally have a standardized price model that is either a fixed rate regardless of transaction volume or reduced costs the more you trade. Many centralized exchanges also impose charges for withdrawal to external wallets, and others even charge deposits. Transacting on decentralized exchanges, on the other hand, is peer-to-peer, and does not require a central intermediary, therefore the costs are significantly lower as compared to centralized exchanges.
2. Security Breaches
Since centralized exchanges employ a hot wallet to allow users to obtain access to their platform, they are vulnerable to cyber threats. Numerous conventional thieves see the enormous amount of funds transacted in centralized exchanges as an ideal target to steal. The most well-known exchange cyberattacks are targeted centralized exchanges. Huge transactions usually comprise of billions of Bitcoin and other crypto coins, making them an appealing prey for hackers and theft. For instance, Mt.Gox used to be the world's most popular bitcoin trading platform until it announced the theft of $460 million worth of Bitcoin on its platform. After the breach, Mt.Gox declared bankruptcy in 2014.
3. Privacy
Users have considerably greater privacy when they trade with a decentralized cryptocurrency exchange as compared to trading with a centralized cryptocurrency exchange. Rather than requiring users to go through the Know Your Customer (KYC) procedure that centralized platforms need, peer-to-peer transactions may be performed with anonymity, which means that funds can be sent by nearly any individual for any purpose. Furthermore, delegating your private keys to a centralized exchange implies that you do not have complete control over your funds.
Final Thoughts
As of today, centralized exchanges continue to outnumber decentralized exchanges. Since centralized exchanges are more established and have been in the crypto space longer, it is without a doubt that most investors will still go for centralized exchanges. Nevertheless, it is still important to know that the utilisation of a centralized exchange can be a double-edged sword.
Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.