What is a centralized exchange (CEX)?

If you’re new to cryptocurrency trading and you’re wondering where you should invest your cash, you might want to consider the different types of exchanges available to you before you pick a cryptocurrency. One of the biggest and most popular is centralized exchanges (CEX), which allow users in many countries to buy and sell cryptocurrencies using fiat cash.

This, coupled with the fact that centralized exchanges, unlike decentralized exchanges, have official support channels and offer custodial wallets as standard, makes many CEX options more accessible for newcomers who are looking to invest in cryptocurrency for the first time. So, what exactly is a centralized exchange? Let’s find out in this AAG Academy guide.

How does a centralized exchange (CEX) work?

A CEX is essentially a marketplace for cryptocurrencies. They allow you to buy and sell coins and tokens in much the same way you might buy and sell shares in a public company on a stock exchange. Once you have created an account, most centralized exchanges allow you to buy cryptocurrencies with a debit or credit card in supported countries.

A CEX acts as a third-party, matching buyers and sellers, and they are generally considered to be safer and more reliable than decentralized exchanges in certain aspects. That’s one reason why centralized exchanges are by far the biggest in terms of value and trade volume, accounting for 95% of all transactions, according to KPMG.

One of the things that differentiates a CEX from a decentralized exchange (DEX) is that a CEX is governed by a company or central organization — typically the team that founded it. All developments and decisions are the responsibility of the team in control, and they essentially have the power to do whatever they see fit.

Binance, currently the biggest cryptocurrency exchange in the world in terms of value, with a market capitalization of almost $46 billion as of August 2022, is a centralized exchange. Coinbase is the second-biggest, with a value of over $16.5 billion. In comparison, Uniswap, the largest decentralized exchange, has a current market cap of less than $5.5 billion.

What are the advantages of a CEX?

These are some of the biggest advantages centralized exchanges offer over other exchange types:

• Support for fiat currencies
  Centralized exchanges allow users to purchase cryptocurrencies with conventional fiat cash in many countries. This provides users with a quicker and more streamlined route into cryptocurrency investing.

• Regulation
  In many countries, centralized exchanges are subject to the same regulations as other financial institutions. While this may seem like a downside to some traders, regulation offers users greater protection and peace of mind. It prevents exchanges from doing whatever they like with your assets.

• High liquidity and trade volumes
  Centralized exchanges have high liquidity and trade volumes, which means they can instantly open and close orders so users don’t have to wait while trading. This prevents liquidity problems, slippage fees, and slow filling processes. High liquidity and volume also reduce volatility and manipulation.

• Customer support
  Centralized exchanges typically offer official support channels that can help users solve problems when they arise, which is rarely the case with decentralized exchanges. This can be hugely attractive to new cryptocurrency traders who may need assistance when making their first investments and trades.

• Custodial wallets
  Most centralized exchanges offer a custodial wallet as standard, giving users a place to manage their digital assets without having to worry about things like seed phrases and private keys. This saves users from having to set up a separate, non-custodial wallet before acquiring their first cryptocurrencies.

What are the disadvantages of a CEX?

These are some of the biggest disadvantages of centralized exchanges:

• Security
  The size and centralized nature of CEXs make them an easier and more attractive target for attackers. Centralized systems are always more susceptible to hacking than decentralized systems that do not operate on a single system.

• Regulation
  As we mentioned above, while regulation is an advantage for some traders, it is a disadvantage for others. Regulation means users have to disclose lots of personal information when signing up for a CEX, so anonymous trading is impossible.

• Availability
  Centralized exchanges support a very small percentage of the total number of cryptocurrencies available today — mostly the biggest cryptocurrency options in terms of value. That means that if you want to invest in smaller projects, particularly those that are new, you’ll need to use a decentralized exchange instead.

What are the most popular CEX options?

The 10 most popular centralized exchanges, according to CoinMarketCap, are currently:

1. Binance
2. Coinbase
3. FTX
4. Kraken
5. KuCoin
6. Gate.io
7. Binance.us
8. Huobi Global
9. Bitfinex
10. Gemini

References 

• What Are Centralized Cryptocurrency Exchanges?
• What Is a Centralized Exchange (CEX)?
• What Is a Centralized Exchange, and Should You Use One?
• Centralized Exchanges Vs. Decentralized Exchanges