What is Centralized Exchange in Crypto Trading?
Centralized crypto exchanges (CEXes) are websites that serve as cryptocurrency marketplaces. Some are pure exchanges, while others, like Binance, are ecosystems that include a blockchain with their native tokens. Centralized exchanges facilitate large-scale crypto trading by keeping large amounts of coins and tokens for liquidity. Cumulatively, they account for over 95% of all crypto trading globally.
They are centralized because these websites rely on a centralized team to run the show. Accordingly, CEXes follow some regulations that govern traditional banks and stock exchanges. Other examples are Coinbase, Gemini, Kraken, and OKEx. These exchanges typically keep digital order books listing open buy and sell orders. Some exchanges are so large that listing news or a liquidity crunch can affect token prices.
Why Do We Need A Centralized Crypto Exchange?
There are a few key reasons why we need a centralized crypto exchange:
- They provide a higher level of liquidity than a decentralized exchange. This is because there are more people trading on the centralized exchange, which means that there is always someone willing to buy or sell your coins.
- They offer a better price for your coins because they can match buyers and sellers more efficiently. This means that you are more likely to get the price you want when you trade on a centralized exchange.
- They give a wider range of features than a decentralized exchange. For example, most centralized exchanges offer margin trading, which allows you to trade with leverage. This can be a great way to increase your profits, but it can also be very risky.
- They avail customer support in case you have any problems with your account. This is not something that you will find on a decentralized exchange.
What are the Disadvantages of Centralized Crypto Exchanges?
There are a few major downsides to centralized cryptocurrency exchanges. First, they are often subject to hacking and other security risks. This is because all of the user information and funds are stored in one central location. If this central location is breached, then all of the users’ information and funds are at risk. Second, centralized exchanges often have high fees. This is because they have to cover their own costs, as well as make a profit. Third, centralized exchanges are often slow and cumbersome to use. This is because they need to follow know-your-customer (KYC) and anti-money laundering (AML) regulations, which can slow down the process of buying and selling cryptocurrencies.
What Are DEXes And CEXes?
Centralized and decentralized exchanges (DEX) aim to achieve the same goal but through different means. For centralized exchanges, there is an element of human management supervising exchange activities. DeXes rely on automated transactions through smart contracts and liquidity pools. Therefore, the third-party supervision of exchange activities is limited. Centralized exchanges are still significantly more efficient, but DEX technology is catching up fast. Most DEXes rely on Automated market makers (AMMs) to match orders without human intervention. Accordingly, they don’t need custodial storage of user funds as the order matching is automated.
Is Cryptocurrency Centralized Or Decentralized?
Cryptocurrencies are decentralized to varying extents. Bitcoin is the most difficult to mine and attack because of its global distribution. Some rely on more centralized distribution models but still run on the blockchain.