Blockchain technology continues to offer different order types, investment tools, and assets for both traders and investors with its innovative trading processes. Centralized exchanges are a type of a tool that many people who want to invest in crypto money use quickly, safely, and for a long time. A better understanding of CEXs for traders mainly depends on their understanding of the differences between decentralized exchanges, their understanding of the way they work, and, of course, taking into account the advantages and risks.
KEY TAKEAWAYS
- Centralized exchanges are platforms that collect users’ buy and sell orders through an order book they process and ensure that these orders are completed in the fastest way possible.
- Unlike decentralized exchanges, CEXs take custody and oversight of all the currency that users associate with the exchange. As long as the traders do not withdraw their money out of the stock market, they receive an amount of IOU corresponding to the asset they own.
- The main advantages of using CEXs are that they offer high transaction speed, a chance to trade coins on different blockchains, a chance to use many of debit and credit cards, high liquidity, etc.
- The main disadvantages of using CEXs are that they require so much personal information, do not list certain beginner coins, they can be regulated, etc.
I prepare a legendary centralized exchange (CEX) review content for you. In this content, you will see the factors that you need to take into account while trying to understand and compare many CEX platforms with each other, and then you will manage the trading and investment process more consciously. If you’re ready, let’s get started!
Table of Contents
The Definition of Centralized Exchange (CEX)
Centralized exchanges are platforms that collect users’ buy and sell orders through an order book they process and ensure that these orders are completed in the fastest way possible. Transaction orders created by users are a set of information that includes buying or selling a particular cryptocurrency. What centralized exchanges do is collect these financial orders created by users in their networks, match financial orders of which values correspond to each other, and then realize them automatically. Basically, CEX users trade with the exchange, not directly with each other.
How Do Centralized Exchanges (CEX) Work?
Unlike decentralized exchanges, CEXs take custody and oversight of all the currency that users associate with the exchange. As long as the traders do not withdraw their money out of the stock market, they receive an amount of IOU corresponding to the asset they own. Each transaction recorded in the stock exchange ensures that the changes in the current assets of the users are known by the center. When users want to withdraw their money from the exchange, IOUs are converted into real currency and transferred to the targeted account.
It is possible to say that CEXs have become very popular in the crypto money world as of 2020, as they are very close to the working systems of traditional exchanges and offer an institutional view of the highly volatile crypto money world. Binance, Binance US, Kraken, Coinbase, Gemini, and many more are decentralized exchanges that achieve the highest trading volumes in the world.
Risks & Benefits of Centralized Exchanges for Crypto Traders and Investors
There are of course a number of advantages and disadvantages to CEXs maintaining transactions based on a centralized entity. Before going into details, let’s say this: Of course, the most prominent advantage is the trust it gives to users and transactions accelerated by the intervention/technology of a center. The biggest disadvantage is that records that become vulnerable due to a centralized collection of data, which may cause an important loss for users in the case of a cyberattack.
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Benefits of Using CEX for Financial Transactions
CEXs, which take care of continuous development processes with the aim of providing a high user experience, allow you to trade with tokens in different Blockchains, and consider it their responsibility to provide additional support such as customer service to users since they are centralized, offer a number of advantages.
| Ease of transacting with credit and debit cards | Centralized exchanges’ regulation and that they have a center means that they can also be in contact with banks. This allows you to buy cryptocurrencies from CEXs with your credit and debit cards. This feature is unfortunately not available on DEXs. |
| Identity control to ensure user security | CEXs apply KYC (Know Your Customer) policies in order to prevent identity fraud in the system and request an ID card photo, an official document containing residence information, and selfies in which your face is clear, for new memberships. All of these are designed to prevent users from becoming victims of fake identities. |
| High liquidity | Today, centralized exchanges have very high liquidity pools. For example, at the time of writing this content, Binance’s daily trading volume had reached over 40 billion. Coinbase, on the other hand, was up more than 30 percent with a trading volume of $9 billion. Increased liquidity allows users to buy and sell any cryptocurrency they want, whenever they want. Because as the transaction volume increases, it becomes more likely to find and match another order in the system that will correspond to a user’s order. |
| Customer service | Centralized exchanges’ obtaining custody over users’ funds creates a serious customer-server relationship. This situation has caused the relevant exchanges to have strong customer service departments that can support users with privacy, security, and access problems. |
| Coins from different blockchains | While DEXs only allows you to buy and sell coins on the blockchain they were built on (which is usually the Ethereum or Binance Smart Chain), CEXs allow you to access cryptocurrencies built on different blockchains. Ethereum base, Solana base, Avalanche base, Hedera base, Blockchain base, or much more. |
Risks & Disadvantages of Using CEX for Financial Transactions
The fact that CEXs rewrite all “untraceability” rules with the wallets and centralized system they offer in crypto money trading processes, of course, brings along a number of disadvantages for traders and investors. Let’s examine them.
| Strict Know-Your-Customer (KYC) Policies | In order to register for CEXs, users have to share with the center a document containing a lot of personal information, from driver’s licenses to ID cards, from residence documents to photos of their faces. It should be noted that this not only reduces privacy but also makes these platforms a target for personal data theft. |
| Control over user funds is on the exchange | Unlike DEXs, CEXs keep custody of all funds traded by users on the platform. This can be a disadvantage for users who only want access to their funds and are concerned about trusting a third party. |
| Lower APYs compared to DEXs | CEXs can provide almost all services such as lending, borrowing, staking, and liquidity mining that DEXs offer today. However, APY rates can be lower when compared to DEXs. Because a center and intermediaries mean more funds to be spent. |
| Unlisted coins | Coins of projects that are still in their infancy are often not listed on CEXs. Waiting for them to be listed on these platforms is actually waiting for their prices to rise. CEXs may not give you the opportunity you need to buy projects you believe in from the beginner level. |
| Regulations | As CEXs are managed by companies that can be tracked and audited, they are subject to the financial regulations of the countries they serve. This means that the funds in your CEX wallet can be closed overnight with a new regulation. While this is not very likely, it is a potentially plausible possibility. |
The Future of the CEXs: Off-Chain Order Books as Semi-Centralized Platforms
As you can see in the DEX content we shared with you earlier, both worlds have a number of “best” features. There are many traders who think that exchanges combining these bests will come to the fore in the future. In fact, it is possible to say that off-chain order books are “middle ways” created by taking advantage of the logic of a centralized and decentralized stock market.
In DEXs, the confirmation of transactions is required for is done within the network, by nodes. This consensus system ensures the reliability of transactions and is also processed through smart contracts. The most basic feature of off-chain order books is that they turn to an off-chain solution for this approval and processing process, instead of waiting for the approval of all nodes in the chain to verify each transaction that takes place.
Off-chain order books use an order book that executes peer-to-peer transactions in a center that is outside of the chain while operating with a decentralized logic within its own chain. These order books contain information such as transaction size, expiration date, price, and volume for each transaction performed in the chain. The main reason for employing this type of off-chain order book is to provide users with the financial opportunities offered by decentralized chain technology and to offer advantages such as efficiency and speed that a centralized system will provide, at the same time.
dYdX, IDEX, and 0x are good examples of off-chain order books.
Main Differences Between CEXs ad DEXs in Terms of 6 Factors
Before wrapping up the content, we wanted to share with you our detailed chart comparing CEXs and DEXs on six key factors. This table compares two different platform types in terms of the execution process, data storage method, market-making steps, transaction fees, transaction speed, and the chance of anonymity offered to users.
| CEXs | DEXs | |
|---|---|---|
| Data storage method | Center server | Blockchain |
| Execution process | Through intermediary organizations | Through smart contracts, no intermediary |
| Market making | Order book | Automated market maker (AMM) protocol, Off-chain Order Books, or P2P Transactions |
| Transaction speed | Faster transactions just in milliseconds | Slower transactions |
| Transaction costs | Higher trading fees | Lower trading fees |
| The change of anonymity | Identity information must be disclosed during the registration | The one and only disclosed information is the wallet address of the user |
What Are The Most Popular Centralized Exchanges (CEXs)?
Let’s review the most popular centralized exchanges together in terms of market capitalization value:
| Binance | Binance, which supports more than 600 cryptocurrencies, is also trying to dominate the market by making new initiatives such as Binance NFT, and Binance DEX. Binance’s biggest advantage is that it gives you access to a large number of coins and its security protocols. The main disadvantage is that the US version is Binance US. In this version, there are fewer currency pairs than in the global version. |
| Coinbase | Supported by numerous APIs, Coinbase provides various conveniences in order placement and access to real-time market data. Transactions take place very quickly because there is strong liquidity. Coinbase’s market cap is second in the global ranking. |
| FTX | Standing out with its easy-to-use mobile application, various referral programs, comprehensive language support, and APIs, FTX also offers various passive income options such as staking. It is also possible for users to trade NFT over FTX. |
| Kraken | Supporting over 65 cryptocurrencies, Kraken is popular for its very low transaction fees for non-instant purchases. However, if you want to buy instantaneously, the fees increase faster than normal. The financial products of the platform are very diverse, there are many options such as staking, funding, indices, and margin trading. But it is a little poor in terms of educational content. |
| KuCoin | Offering rewards up to 500 USDT to new users, KuCoin is a highly liquid platform. Here you can not only trade but also leverage trading. Those who want to earn passive crypto income can participate in the staking mechanisms of the exchange platform. KuCoin supports over 600 cryptocurrencies. |
| Huobi Global | Huobi is an advantageous CEX that allows you to buy crypto with your credit card without interruption. In addition, it is possible to make P2P lending through Huobi by completely zeroing the transaction fees. Huobi is a platform that allows leverage trading up to 5X under legal assumptions. However, when compared to its competitors, Huobi’s upper withdrawal limit is low. |
| Gate.io | Supporting more than 1300 cryptocurrencies, Gate.io provides a great feature that allows you to copy the strategies of users who generate high income from their trading. It’s called Copy Trading and it’s just been released. The platform is compatible with IoS, Windows, and Android. Gate.io stands out by offering a large number of financial products. |
| Bitfinex | BitFinex, a decentralized exchange, offers a market-debut service that will bridge with DeversiFi, a layer-2 trading platform so that its users can also access DeFi services. The platform has separate financial products that will provide advantages for lenders and traders. Bitfinex allows you to easily borrow cryptocurrencies with advantageous collateral amounts. The prominent disadvantage of the platform is that it does not allow depositing with credit/debit cards and e-wallets. |
| Crypto.com Exchange | Crypto.com is ninth on the market cap as an exchange platform. Users with an account here can trade not only cryptocurrencies but also NFTs. People who want to trade margin can trade more than 200 pairs up to 10x leverage. Those who want to invest in derivatives can trade with more than 40 quarterly futures. |
| Gemini | Gemini, which aims to make portfolio management easy for users, offers functional graphics that allow you to monitor the change in the value of assets on a daily basis and with the ”percent” rates. The biggest advantage of the platform is that it is legal in all US states. Users can trade from anywhere with more than fifty cryptocurrencies. However, high transaction fees stand out as a disadvantage. |
Is there any centralized cryptocurrency?
Yes, depending on centralized exchanges, cryptocurrencies offered by such platforms can also be centralized. For example, Coinbase, GDAX, Kraken, and Gemini are some of them.
What is a hybrid cryptocurrency exchange?
Next-generation platforms that aim to incorporate the positive features of both centralized and decentralized cryptocurrency exchanges in their structures are called hybrid cryptocurrency exchanges. These are also commonly known as semi-decentralized exchanges and can offer users both the availability of centralized platforms and peer-to-peer DeFi solutions of decentralized platforms. Among them are Qurrex, Eidoo, Legolas. Among the features that are used extensively on such platforms are the escrow method, flawless transaction execution, and Atomic swap exchange. Especially the last feature allows currency exchange and peer-to-peer trading without the need for any third party.
What are centralized cryptocurrency exchanges?
Centralized cryptocurrency exchanges with the highest values in terms of the trading volume include Binance, Coinbase Exchange, FTX, Kraken, Huobi Global, KuCoin.
What are the advantages of a semi-decentralized trading platform?
Cryptocurrency exchange platforms, called semi-decentralized or hybrid, provide:
Users have custody over their own funds.
Users have the chance to protect their privacy even during the registration process.
Users’ funds are kept in cold storage, not hot wallets. This makes the platform more protected against a possible cyber attack.
Transactions occur faster than traditional DEXs and are completed with lower transaction fees than traditional CEXs
