What Are Centralized Cryptocurrency Exchanges?

If you’re a crypto trader, you’re probably familiar with sites like Binance, Coinbase, Bitfinex, Gate.io, and others.

All of these platforms are centralized cryptocurrency exchanges. What makes them centralized is that these platforms oversee the laws and regulations that govern how transactions are carried out, and they receive a share of all trading fees.

Whether you like trading spots or futures, centralized exchange platforms will always provide you with the possibility to leverage and make a reasonable amount of money in trading; however, because crypto is a high-liquidity market, there is also a large risk of loss.

What-Are-Centralized-Cryptocurrency-Exchanges

Additionally, CEX has drawbacks such as large transaction fees and they are prone to hacking.

So, are centralized cryptocurrency exchanges 

worth the risk, or should you focus on trading with decentralized platforms?

In this post, you will learn more about centralized cryptocurrency exchanges, their functions, benefits and drawbacks, and the distinction between centralized and decentralized crypto exchange platforms.

What are Cryptocurrency Exchanges?

Cryptocurrency exchanges are cryptocurrency trading platforms where you can buy and sell cryptocurrencies and other digital assets.

In cryptocurrency, there are both centralized and decentralized Cryptocurrency exchange platforms. 

While a decentralized exchange allows peer-to-peer transactions directly from your digital wallet without going through an intermediary. Centralized exchanges, on the other hand, serve as an intermediary between buyers and sellers. 

READ ALSO: How Cryptocurrencies Impact Estate Planning

What Is a Centralized Exchange?

A centralized crypto exchange is an exchange that’s created and controlled by a company. These exchanges are considered centralized because one company oversees all the transactions and sets the trading rules and fees. 

Generally, centralized cryptocurrency exchanges connect a buyer and a seller and earn money through commissions and transaction fees. 

Popular centralized crypto exchanges are Coinbase, Binance, and Crypto.com. These exchanges allow cryptocurrency traders to buy and sell digital assets at the prevailing price or fix price and leave orders to get executed when the asset gets to the desired price target.

Centralized exchanges (CEX) operate using an order book system, which means that buy and sell orders are listed and sorted by the intended buy or sell price. 

Moreover, some platforms offer additional features, such as the ability to earn interest by lending or staking your crypto for a specific period. 

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What Does a Centralized Cryptocurrency Exchange do?

A Centralized cryptocurrency exchange has two primary roles:

#1. Order Matching

In a centralized crypto exchange, buyers and sellers transact with each other. This implies that you purchase crypto from another user of the exchange instead of from the exchange itself.

The exchange platform provides an option where people who want to buy and sell crypto place their orders and the order engine will match buyers and sellers.

For example, if a buyer wants to buy Etherium at $50,000 and a seller wants to sell Etherium at the same price, the exchange matches the orders of these two people.

#2. Clearing Counterparty

The exchange also acts as a central clearing counterparty. What this means is that all matched orders appear to be against the exchange itself rather than between the users directly. This provides anonymity for both parties since the buyer won’t know who the seller is and vice versa.

Also, as the main clearing counterparty, the CEX oversees the entire process of the transaction. They ensure that all obligations are met between buyer and seller and that the transactions are completed before they release funds to the seller or buyer.

What is the Difference Between Centralized and Decentralized Exchanges?

You can use centralized exchanges to conduct trades from fiat to cryptocurrency (or vice versa). They can also be used to conduct trades between cryptocurrency pairs. 

A decentralized exchange is an automated platform that facilitates crypto trades. Decentralized crypto exchanges are actively run by a decentralized network of computers, meaning no single entity has control over the platform once it’s set up.

Also, decentralized exchanges function as peer-to-peer exchanges. Escrow services never hold the assets, thus, transactions are done entirely based on smart contracts.

Generally, the most significant difference between centralized and decentralized exchanges is whether or not a middleman is present. 

You may also want to read: What is Decentralised Finance(DeFi) and How Does it Work?

What are the Advantages of Centralized Cryptocurrency Exchanges?

The following are the advantages of centralized cryptocurrency exchanges:

#1. User-friendly

Using crypto wallets and peer-to-peer transactions can be intricate. Now, whether you’re a newbie investor, you can easily learn how to navigate centralized exchange platforms and place your trade.

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Also, users of centralized exchanges can log into their accounts, view their account balances, and make transactions through applications and websites.

#2. Reliability 

When it comes to transactions and trading, centralized exchanges offer an extra layer of security and reliability. By facilitating the transaction through a developed, centralized platform, centralized exchanges offer higher levels of comfort and security.

#3. Leverage

One of the other benefits of certain CEX is the option to leverage your investments using borrowed money from the exchange, called margin trading. It allows investors to reap higher returns, however, losses can also be amplified.

What are the Disadvantages of Centralized Cryptocurrency Exchanges?

Below are some of the disadvantages of centralized cryptocurrency exchanges:

#1. Risk of Hacking 

Centralized exchanges are operated by companies that are responsible for the assets of their customers. Large exchanges usually hold billions of dollars worth of cryptocurrencies, making them a target for hackers and theft.

#2. High Transaction fees

Contrary to peer-to-peer transactions, centralized exchanges usually charge high transaction fees for their services, which can be high, especially when trading in large amounts.

#3. Custody of Digital Assets

A key contrast between a CEX and a DEX is that a CEX provides a custodial crypto wallet. This implies that the company keeps track of how much cryptocurrency you have and stores it for you, but you don’t have access to the private keys that allow you direct control over the cryptocurrency. Instead, you would have your account login details.

Rather than allowing you to store your private keys in your digital wallet, most CEXs will maintain your digital asset as a custodian in their digital wallet. While it is easier to trade, there are certain disadvantages, including the danger of the centralized cryptocurrency exchange failing and fraud.

FAQs About Centralized Cryptocurrency Exchanges

What are the most popular centralized cryptocurrency exchanges?

What are Centralized Exchanges?

A centralized cryptocurrency exchange is a trading platform that is developed and managed by a company. These exchanges are regarded as centralized since a single organization controls all transactions and establishes the exchange’s rules and regulations.

Are all Crypto Exchanges Centralized?

No! Although centralized cryptocurrency exchanges are the best means of trading crypto and other digital assets. There are also decentralized cryptocurrency trading platforms; examples of DEXs include Uniswap, PancakeSwap, dYdX, and Kyber. etc.

What are the main types of Crypto Exchanges?

The main types of crypto exchanges are as follows:

  • Centralized exchanges (CEXs), 
  • Decentralized exchanges (DEX) 
  • Hybrid exchanges (HEX)

Is Binance centralized or decentralized?

Binance.com is a centralized exchange platform. 

Is it safe to store cryptocurrency on a centralized exchange?

If you decide to store your coins on a centralized exchange, you’ll need to trust in your exchange of choice to protect your private key and make sure your crypto assets don’t vanish, just as you must trust your local bank to honor your account balance and keep your money safe. So, it’s a game of risk.

Conclusion

Every day, new centralized cryptocurrency exchanges are being launched. However, because these systems are vulnerable to hacking, not all of them will be successful.

Another important aspect of a successful trading platform is its trade volume. The higher the trade volume, the lesser the likelihood of volatility and market manipulation on that exchange.

Additionally, it’s crucial to remember that some exchanges are safer than others even if none are secure from bad actors like hackers.

If you run into problems, the exchange may have customer service representatives who can assist you.

So, the most popular way for investors to enter the cryptocurrency industry is still through a centralized exchange.

However, because this post was designed for educational purposes, you must make sure that you conduct adequate research before choosing your trading platform.

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