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What is a Centralized Exchange (CEX)?

Jaiya Gill

What is a Centralized Exchange (CEX)?

While decentralized exchanges are becoming more popular, centralized exchanges are still a key gateway to crypto for most people.

What’s a Centralized Exchange?

Centralized Exchanges (CEXs) are a type of cryptocurrency exchange that’s operated and controlled by a company. They are online platforms used to buy and sell crypto. Essentially, they’re like a marketplace. They’re useful when a lot of people are simultaneously trying to buy and sell the same type of assets. They also have similar business models to traditional exchanges like stock exchanges. 

Centralization refers to the use of a middle man or third party to handle assets. This is similar to a bank, where customers trust the bank to hold their money. This adds an additional layer of security and monitoring. The same principle applies to centralized exchanges.

One of the most famous exchanges in TradFi is the New York Stock Exchange. In crypto, there are a few popular centralized exchanges. These include Coinbase, Binance, Kraken, and Gemini.

CEXs facilitate trades between users by maintaining an order book, which are buy and sell orders posted by individual traders. Orders are requests to buy or sell a certain amount of crypto at a certain price. CEXs can be used to conduct trades from fiat to crypto (or vice versa) or to convert exchanges between two different cryptocurrencies.

Advantages of CEXs

  1. User-friendly: CEXs are less complex than crypto wallets or peer-to-peer transactions. Users can just log into their accounts, view their balances, and make transactions through websites and applications.
  2. Reliable: They add an extra layer of security and reliability by facilitating trades and transactions through a developed, centralized platform.

Disadvantages of CEXs

The reliance of CEXs on a central entity does have some disadvantages. 

  1. Risk of getting hacked: CEXs hold custody over users' assets, making them a lucrative potential target for attackers.
  2. Transaction fees: They charge high transaction fees for services and convenience, which can be especially high when trading large amounts.

Overall, CEXs are the most common and easiest way for beginner investors to enter the crypto space. The speed and cost-efficiency of processing trades make them especially convenient for buying and selling crypto.  

On the other hand, if you're interested in learning more about Decentralized Exchanges (DEXs), check out our article on DEX here.

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