Tokens can be traded on multiple exchanges or trading platforms. Apart from exchanging tokens, crypto enthusiasts engage in trading activities such as margin trading, futures trading, and derivatives trading, among others. Typically, these operations are conducted on centralized exchanges (CEX).
This article extensively explores the concept of centralized exchanges and what to expect while using them.
What is a Centralized Exchange?
A centralized exchange is a trading platform used by cryptocurrency enthusiasts to trade tokens and conduct various trading operations through an order book. The order list contains requests from people who want to purchase or sell cryptocurrencies at a specified price.
Typically, centralized exchanges serve as custodial trading platforms, which means that before a trade can take place, it must pass through an intermediary. The intermediary ensures that both buyers and sellers can seamlessly exchange tokens. They are in charge of the platform’s security and the safety of traders’ crypto or fiat assets.
Centralized exchanges are trading platforms that rely on an intermediary to oversee the exchange process, security, custodial services, and other operations. This type of exchange is usually a target of censorship by governments. Countries such as the United States have tightened regulations on centralized exchanges. For example, centralized exchanges in the United States are required to report to the Securities and Exchange Commission (SEC).
How does a CEX work?
A custodial authority aids in the operation of a centralized exchange. Before a trader can swap tokens, they must first register, which may take some time. Most centralized crypto exchanges also require traders to go through the Know Your Customer process, which involves submitting identification documents and proof of residency information.
Centralized exchanges may occasionally allow customers to bypass the KYC process and enjoy limited trading services.
Centralized exchanges, depending on their size, have a higher level of liquidity, which reduces the risk of slippage, as opposed to a decentralized exchange (DEX). This means that traders can seamlessly swap their tokens without experiencing any delays. They typically operate with order books, which are collections of buy and sell orders at specific prices.
Compared to a decentralized exchange (DEX), a CEX typically provides more trading options. A decentralized exchange is likely to provide swapping features, but a centralized exchange allows users to conduct spot trading, futures trading, margin trading, derivatives trading, and many other operations.
Advantages of CEX
Crypto traders commonly utilize centralized exchanges due to the following advantages.
• Trusted system
Owing to recent incidents of crypto fraud, people in countries with crypto legislation are more likely to trust exchanges that adhere to these regulations.
For example, only a few centralized exchanges are licensed to operate in the United States. Before obtaining a license to operate, centralized exchanges must go through a vetting process, which helps to improve the trust system.
• Custodial effect
Centralized exchanges are custodial, which has some advantages, especially for new crypto traders. New crypto traders don’t have to worry about managing their private keys as their tokens are held by centralized exchanges. The centralized exchange ensures the safety of the tokens, allowing traders to focus on trading.
• Better user experience
Centralized exchanges take pride in providing an easy-to-use trading platform. Many have instructional videos available and dedicate resources to optimizing their overall user experience. They have a customer service team to support users.
Centralized exchanges usually offer multiple payment methods, making it easy for new users to purchase cryptocurrencies with fiat currency. Many of them accept a wide range of bank cards and payment channels.
• High level of liquidity
Centralized exchanges, such as Binance and Coinbase, have a high level of liquidity, allowing consumers to instantly swap tokens without having to wait long periods or worry about the significant risk of slippage.
Drawbacks of Centralized Exchanges
While centralized exchanges have significant advantages, there are some drawbacks to using them.
• Security
Cybercriminals have shifted their focus to centralized exchanges. This type of exchange is custodial, which means it holds its users’ crypto assets. Hackers often seek ways to gain access to the hot wallets of these exchanges to steal tokens.
Users entrust their crypto assets to a custodial exchange in the hope that will the safety of their tokens is guaranteed. Users’ assets may be lost if a phishing attack or any other security breach occurs. Sometimes, crypto exchanges compensate users who lose their tokens to hacks or other security breaches.
• Regulatory concerns
Various regulators have begun to impose severe restrictions on centralized exchanges. Some of these centralized exchanges are unavailable in certain countries, while others may face sanctions for other reasons.
Custodial exchanges can be easily shut down at the whim of authorities, and in some cases, users are allowed to transfer their cryptocurrencies to other exchanges or wallets.
• Cryptocurrency options
Centralized exchanges have fewer cryptocurrency options than their decentralized counterparts. These exchanges do not provide permissionless listing, therefore they have control over which tokens are listed. Listing cryptocurrencies on this form of exchange is often challenging, limiting traders’ options when using their services.
Can CEXs be regulated?
Various countries have different legislations regarding centralized exchanges. More and more countries are enacting legislation to regulate the operations of cryptocurrency exchanges in their respective jurisdictions.
In the United States, for example, only a few crypto exchanges, such as Binance.us and Kraken, are permitted to cater to clients.
As a result of regulations, many centralized exchanges require users to go through the Know Your Customer process before they can access their services.
Some countries also require CEXs to apply for a trading license before offering trading services to residents.
Before using centralized exchanges, it is always a good idea to examine the existing legislation in your region.
Popular Centralized Exchanges
Some centralized exchanges have grown in popularity in recent times. These exchanges have grown in transacting volume and are accessible in numerous countries. Some popular centralized exchanges are listed below.
Binance
Binance is a centralized exchange that has significantly grown in trading volume and has expanded to different parts of the world. Though this centralized trading platform may be popular, it is not allowed to operate in the United States and the United Kingdom at the time of writing.
Binance had to partner with other stakeholders in the US to launch a customized crypto exchange that was in line with the regulations- Binance.us. This variant is solely available to Americans.
Binance is an online exchange where users can trade cryptocurrencies. It supports the most widely traded cryptocurrencies.
This crypto exchange offers multiple trading pairs and trading options. As a crypto trader, Binance offers hundreds of cryptocurrencies to swap. It also supports peer-to-peer trading, allowing users to trade with one another. This option is popular among residents of countries that have prohibited financial institutions from allowing residents to use credit or debit cards to make purchases on crypto exchanges.
Binance, in addition to its cryptocurrency exchange, features a launchpad and an NFT Marketplace, allowing users to access different blockchain services with a single account.
Kraken
Kraken is one of the few cryptocurrency exchanges licensed to operate in the United States. It is a US-based crypto trading platform founded in 2011. It allows users to seamlessly swap tokens or exchange crypto for fiat currency and vice versa. Kraken can be used by individuals living in the United States and other countries.
Kraken, too, includes hundreds of cryptocurrencies, however, its portfolio does not include as many tokens as Binance.
AscendEx
AscendEx, formerly known as BitMax, was founded in 2018 and is headquartered in Singapore.
AscendEx, like Binance, offers features such as spot trading, futures trading, and margin trading. It has a large number of listed tokens and several trading pairs.
OKX
OKX, formerly known as OKEX, is one of the world’s largest derivatives and spot trading exchanges. Traders can access derivative and spot trading options on this trading platform. The Seychelles-based exchange is owned by OK Group. Its user experience is satisfactory, although it is unavailable to individuals living in the United States.
In Conclusion,
- Centralized Exchanges are custodial, which means that they hold user tokens.
- Centralized exchanges are more regulated than decentralized exchanges.
- Not all custodial exchanges are authorized in the United States.
- Popular centralized exchanges include Binance, Coinbase, Kraken, and OKX.
- Conduct due diligence before using a crypto exchange or trading cryptocurrencies.
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