A centralized exchange (CEX) is a platform where you can buy, sell, and trade cryptocurrencies, it functions as a centralized entity, holding users’ assets and managing transactions on their behalf. In contrast to decentralized exchanges, where users own and manage their own assets, CEXs provide a more traditional trading experience, like traditional stock exchanges.
What are Centralized Exchanges (CEX)?
A centralized exchange (CEX) is a trading platform for cryptocurrencies or digital assets. It facilitates buyers and sellers, allowing them to transfer assets directly with one another. A centralized exchange is distinguished by the fact that it is managed by a single entity, typically a corporation, which has complete control over the platform and its operations.
This centralization allows the exchange to provide a wide range of services, including order matching, trade execution, and asset custody, but it also requires customers to trust the exchange to manage their assets securely and accurately.
Another major feature of centralized exchanges is that they frequently require users to go through a verification process, which typically involves providing personal information as well as a government-issued ID. This criterion is intended to ensure that anti-money laundering (AML) and know-your-customer (KYC) rules are followed.
Here are some of the most used centralized exchanges: Binance, Coinbase, Kraken, Bitfinex, and Huobi.
Roles of Centralized Exchange (CEX)
The role of centralized exchanges is to provide a platform for traders to purchase and sell cryptocurrencies and digital assets, maintain asset security, assure regulatory compliance, and operate as market gatekeepers. These are essential for the cryptocurrency market’s growth and development. Here are the most essential roles played by the CEX:
1: Order Matching: On a centralized exchange, order matching refers to the process of matching a buyer’s order with a seller’s order. This is the mechanism that allows buyers and sellers to directly trade cryptocurrency and digital assets. Furthermore, order matching is a core aspect of centralized exchanges since it allows traders to transfer assets swiftly and efficiently without having to find a buyer or seller on their own as well as it also contributes to the exchange operating in a fair and transparent manner by ensuring that trades are conducted at the best available prices.
2: Clearing Counterparty: The clearing counterparty is an important participant in the centralized exchange, providing services to settle and clear contracts, lowering the risk of counterparty default, and guaranteeing that trades are conducted and settled appropriately. The clearing counterparty contributes to the integrity of the transaction settlement process, allowing the exchange to run smoothly and securely.
3: Custodian: In a centralized exchange, the custodian’s responsibility is to provide secure storage and management of users’ assets, to assure their safety and availability, and to provide accurate and dependable record-keeping and administration. The custodian contributes to the exchange’s trust and confidence, allowing it to operate effectively and efficiently.
How Does a Centralized Exchange (CEX) Work?
Centralized exchanges function by bringing buyers and sellers together in a centralized marketplace, facilitating deals, settlement, and clearing trades. The exchange offers a platform for customers to trade cryptocurrencies and digital assets, as well as features such as secure storage, quick and efficient trade execution, and dependable record-keeping.
A centralized exchange works as follows:
1: Account creation: Users open an account on the centralized exchange and deposit their assets in the custody of the exchange. The matching balance is subsequently credited to the user’s account as a result of the exchange.
2: Order placement: Buyers and sellers can place orders on the exchange, indicating the price and quantity of the asset they wish to buy or sell. These orders are recorded in the order book of the exchange.
3: Order matching: The order matching system of the exchange matches buyers and sellers depending on the details of their orders and when a match is found, the trade is executed and the assets are transferred from the seller’s account to the buyer’s account.
4: Trade settlement: It occurs when the exchange settles the trade by updating the user’s accounts with the right balances and recording the trade details on the blockchain.
5: Withdrawal: Users may remove their assets from the custody of the exchange at any moment. The assets are subsequently transferred from the exchange’s own account to the user’s external wallet.
Top Centralized Exchange Ranked by Volume
Nomics is a cryptocurrency market data and analytics platform that provides real-time, accurate, and in-depth market data and insights on a wide range of digital assets and cryptocurrencies. The platform provides a variety of tools and services to assist users in making informed decisions regarding the cryptocurrency market, as well as instructional resources to assist users in understanding and making the most of the cryptocurrency market.
According to the Nomics analysis here is the list of top centralized exchanges ranked by volume: Binance, OKEx, Coinbase Pro, Bithumb, Kraken, Bitfinex, Upbit, Bitstamp, and Gemini.
Benefits of Centralized Exchange (CEX)
Using centralized exchanges for buying, selling, and trading cryptocurrencies has several advantages, including:
- Customer Service
- A Wide Range of Cryptocurrencies
- Transactions that are completed more quickly
Limitations of Centralized Exchange (CEX)
Online platforms where users can buy, sell, and trade cryptocurrencies are known as centralized exchanges (CEXs). Despite their popularity, CEXs have several drawbacks, including:
- Security Risks
- Lack of Control
- Lack of Privacy
- Third-Party Involvement
- Geographical Controls
- Limited Control Over Funds
- High Fees
- Slow Transaction Speed
Users can trade cryptocurrencies and digital assets on centralized exchanges, but there are certain drawbacks, such as the necessity to trust the exchange to store assets securely, the demand for user identification, and the potential for centralized control and censorship.