Centralized Exchange (CEX)

A centralized exchange (CEX) is a type of cryptocurrency exchange that is centrally controlled by an owner company or institution.

Centralized exchanges usually maintain an order book, thus facilitating transactions between users. Here, the concept of an order is explained as a request to buy or sell a certain amount of cryptocurrency at a certain price.

CEXs collect orders from their users and then use special software to match and execute the respective buy and sell orders. Learn more about how CEXs work.

How Does a Centralized Exchange (CEX) Work?

There is no peer-to-peer decentralized exchange of crypto or fiat currencies between CEX users. Users instead deposit their funds in an exchange, and the exchange takes over the custody of these assets. It then gives the traders the corresponding amount of IOU (I Owe You). The centralized exchange monitors each user’s IOUs and converts them to real currency only as soon as funds are withdrawn.

Possible Advantages of CEXs

Here are the most popular perks of CEXs that make them the point of attention:

• They allow you to buy crypto via multiple methods such as credit cards, debit card,s and wire transfers.
• Since they establish a customer-service provider relationship with users, they have a dynamic that is constantly renewed and provides support to customers.
• CEXs such as Coinbase, Binance, and Kraken have very high liquidity as they have a very high number of users and are operated with a centralized order book. This means that transactions can be carried out very quickly, at the requested price.

Possible Disadvantages of CEXs

The fact that CEXs are under central control also brings some disadvantages.

• First of all, transactions on centralized exchanges are not disclosed to users, resulting in a lack of transparency that leads to market-distorting activities such as price manipulation.
• Second of all, the fact that users’ assets and data are collected in a centralized manner can make a centralized exchange a lucrative target for potential attackers from both outside and inside the organization. An example of this is that over $292 million in client funds were lost in the biggest 12 CEX hacks in 2019. Learn more about other crypto hack scandals.
• Interruption of central exchanges services may result in customers losing buy-sell opportunities. Centralized exchanges cause regulators to freeze or confiscate user funds, and exchange parent companies to disclose their customers’ personal information. This creates a huge confidence gap.

Further reading: What DEXs Are and How They Work