Centralized exchange (CEX) facilitates trading between traders by maintaining an order book. The order book is where individual traders' buy and sell orders are processed. Orders are requests to buy or sell a certain proportion of certain cryptocurrencies at a certain price. Centralized exchanges collect requests from traders and match buy and sell orders. Specialized software is used for this process.
Centralized exchanges do not conduct peer-to-peer (P2P) fiat or cryptocurrency exchanges. When individuals transfer their funds to a platform, the company takes custody of funds and issues virtual IOUs (IOUs) in an amount corresponding to the investor's deposited funds. Centralized exchange keeps track of the investor's IOU holdings and only converts them into real currency upon withdrawal.
CEXs are widely used shopping platforms. The process of transactions on CEX by a single authority provides speed and savings. Despite all this, the centralized structure of CEXs has some disadvantages. CEXs do not publicize internal trades, which leads to less transparency.
By maintaining control over investors' funds, CEXs may be exposed to malicious activity, both internal and external. Technical problems or attacks can cause critical delays in the service provided by CEXs, which may cause users to miss opportunities.
How Do Centralized Exchanges Work?
Centralized exchanges provide neutrality, security and efficiency in crypto asset transactions between investors. CEXs take over the deposited funds and allocate IOUs or credits to individuals. The credits or IOUs issued to users in exchange for their deposited funds are tracked by the CEX during transactions and converted into real fiat currency upon withdrawal.
Buy and sell orders involve users' requests to buy or sell cryptocurrencies at a desired price level. Orders are collected by CEXs, which help calculate, match, and execute buy and sell orders.
What Are the Advantages of Centralized Exchanges?
In general, centralized exchanges are easy to use and are therefore often preferred by users. The simple interface of CEXs is ideal for new users. CEXs have high liquidity, so there is no difficulty in executing trades. The high liquidity makes it simple for users to buy and sell.
CEXs have higher trading volumes than DEXs (decentralized exchange). These factors lead to people not waiting as long for their trades. CEXs offer a larger number of trading pairs than DEXs, and therefore users can access the trading pairs they cannot find on CEXs. Unlike decentralized Exchange venues, centralized exchange venues operate with a KYC (Know Your Costumer) procedure.
What Are the Disadvantages of Centralized Exchanges?
Although rare, there have been attacks that have caused CEXs to suffer large financial losses. CEXs, unlike DEXs, control a person's private key. Therefore, they become the focus of attacks. For example, in 12 major CEX attacks in 2019, investors lost $292 million in funds. CEXs operate with a KYC procedure. This situation negatively affects anonymity.
While more cryptocurrencies can be traded on DEX platforms, CEXs are selective and provide different checks before listing a cryptocurrency. If CEXs are hacked, users may miss out on trading opportunities. CEXs allow regulators to freeze or confiscate users' funds.
What Are the Differences Between Centralized Exchange (CEX) and Decentralized Exchange (DEX)?
CEXs are preferred for exchanging fiat currency for cryptocurrency and vice versa. CEXs are also used to provide transactions between two different cryptocurrencies. DEXs enable peer-to-peer (P2P) transactions by cutting out intermediaries. Funds are not held by the platform and transactions are based on smart contracts and swaps. In short, the most critical difference between CEXs and DEXs is the presence or absence of an intermediary.
