What are Centralized Exchanges (CEX)?

How Centralized Exchanges Typically Work
How Centralized Exchanges Typically Work
  • Centralized Exchanges are online digital platforms that allow to purchase, swap or sell crypto currencies.
  • They are usually owned by a centralized team or a company
  • They are custodial in nature. They manage your funds. When you upload money, it goes into their bank account, with a record of your deposit into their database.
  • You can trade coins and tokens (or digital Assets) on Centralized Exchanges
  • But you don’t hold those digital assets, they do.
  • Wallets are provided by the exchanges
  • Private keys are stored and managed by the exchanges themselves.
  • They are kind of middle-man or intermediaries helping buy and sell cryptos
  • May allow to transfer out assets to external wallets, often with fees.
  • Price shown will be based on OrderBook
  • Trading/Swapping does not happen on blockchain, It occurs within their database.
  • CEX pool user’s cryptocurrencies into Wallets controlled by CEX itself
  • Number and kinds of cryptocurrencies listed are limited
  • They can limit your trade, they can halt your trade, they can lock your account
  • They can be hacked.
  • But they may have production support when you need some assistance.

What are the benefits of Centralized Exchanges?

  • Easier for new investors to get into crypto
  • They have better user experiences
  • They are regulated and carry out legal and regulatory aspects such as KYC (Know Your Customer) checks and AML (Anti-Money Laundering) procedures
  • User don’t need to manage and safeguard Wallets and Keys
  • Listed assets are usually vested, so they are more secure and trustworthy
  • Digital assets can be changed into Fiat (US dollar for example) Usually have high volume and high liquidity

What are the drawbacks of Centralized Exchanges?

  • They are centralized, which can cause
    • Limitations of transactions
    • Censorships on accounts
    • Opposite of Decentralization
    • Intermediaries are making money.
  • You don’t own the fund or the wallet
  • The fee structure might be expensive
  • You don’t manage the private keys, they do
  • They can be hacked and you could lose your money.

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