The arrival of blockchain technology in the world has been associated profoundly with the development of cryptocurrencies. Blockchain offered a decentralized approach with a new business model which could encourage organizations to work as intermediaries. The attention to functionalities of a Centralized Crypto Exchange (CEX) has been growing by significant margins in recent times. Cryptocurrency exchanges working since the beginning of cryptocurrencies have been largely centralized in nature. Therefore, all transactions must go through the systems and infrastructure of the centralized exchanges for successful completion.
On the other hand, decentralized exchanges have emerged as another choice for crypto users seeking reliable and efficient crypto exchanges. You can identify the significance of a centralized exchange for cryptocurrency transactions by understanding the fundamentals of their working. Most people would assume that a centralized cryptocurrency exchange is any business which offers the facility of crypto trading. However, you can also find many other features in centralized crypto exchanges, such as customer support services and account services. Let us uncover more details about centralized crypto exchanges in the following post.
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Definition of Centralized Crypto Exchanges (CEXs)
The introductory overview for centralized crypto exchanges is incomplete without references to their definition. A centralized crypto exchange is a platform which enables users to exchange their crypto assets safely. The centralized exchanges offer a secure environment for buyers and sellers to make transactions. Furthermore, CEXs also serve the role of liquidity providers for supported tokens in their capabilities as market makers. The transactions in centralized exchanges are validated electronically and documented on the related blockchain, which powers the concerned digital assets in crypto transactions.
Centralized exchanges follow a robust approach to decisions regarding the addition of tokens for trading on the exchange. Every token goes through a comprehensive evaluation on the grounds of different factors before being listed on a CEX. Most of the centralized crypto exchanges list tokens on the basis of their reputation, market capitalization and other utilities. Centralized exchanges also offer access to different transaction-related data for helping traders and other users in analysis for better investment decisions. Centralized exchanges utilize the blockchain to exclude the need to rely on intermediary brokers. The direct settlement of all transactions on the exchange through its own interface guarantee freedom from intermediaries.
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Are Centralized Exchanges a Reliable Option for Decentralized Crypto Assets?
The primary objective of blockchain and cryptocurrencies focuses on excluding all types of intermediaries. However, it is also important to understand that a crypto exchange run by a specific company deviates from the principles of decentralization. The exchange provider would offer the facility of selling, purchasing and trading digital assets for a transaction fee. At the same time, centralized crypto exchanges would also keep custody of the private keys of users. Therefore, some users may consider the use of decentralized exchanges as a reliable option over centralized exchanges. Decentralized exchanges let users take complete control over their digital assets and transaction data.
However, decentralized exchanges or DEXs also feature transaction fees alongside network charges for moving digital assets. In addition, a centralized exchange is different from decentralized counterparts on the basis of the storage of private keys of users. Centralized cryptocurrency exchanges serve as custodians of your cryptocurrencies. On the contrary, decentralized exchanges allow users to control private keys alongside their wallet security. Therefore, DEXs could ensure the benefits of improved security against fraud and malicious attacks. However, working with decentralized exchanges requires a significant understanding of the working of crypto. On the other hand, centralized exchanges are easy-to-use platforms for any individual with basic fluency in using computers and online stock brokerage apps or platforms.
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Working of Centralized Exchanges
The outline of a centralized crypto exchange list could offer clear insights for people who know how they work. You can identify reliable centralized exchanges only by identifying their capabilities for addressing the basic functions. Centralized exchanges receive orders for transactions from individual users or institutional clients. The common approach for crypto transactions on centralized exchanges follows the order-matching approach. In the order matching approach, crypto exchanges match the buy and sell orders which have the same pricing. On the other hand, CEXs could also serve as market makers with the provision of liquidity to tokens for improving the execution speed.
The working of a crypto exchange in a centralized format would also emphasize its role as a custodian of user data. It addresses the management of all data related to transactions and sales and buys orders. On top of it, the centralized exchanges can also ensure the availability of data about orders for helping network participants in analysis to ensure effective investment decisions. The exchanges charge a particular fee for offering access to the data. In addition, developers could list the native tokens of their projects by qualifying the vetting process. CEXs also ensure decentralization, as users don’t interact with a broker to place orders. On the contrary, users have their assets in their wallets and can move them to the exchange whenever they want to trade.
Most Noticeable Highlight in Working of Centralized Exchanges
The explanation for ‘how do centralized crypto exchanges work’ would also extend further with emphasis on regulation. Centralized exchanges work with billions of dollars in the volume of cryptocurrencies traded on the platforms while serving millions of customers worldwide. Therefore, CEXs must have authorization from the local governments where they operate for providing their services. The exchanges must also comply with different laws and regulations such as counter-terrorism financing, Know Your Customer and anti-money laundering protocols. In addition, centralized exchanges must also oblige with the conditions of transparent operations. The centralized exchanges should also follow specific procedures which prevent the unnatural manipulation of asset prices.
Is a DEX better than Centralized Exchanges?
The year 2022 marked some noticeable setbacks for the reputation of centralized exchanges. As a matter of fact, it is inevitable to worry about CEXs owing to the collapse of FTX, one of the renowned centralized crypto exchanges. The decisions for choosing an effective platform from a centralized crypto exchanges list could waver in response to the unprecedented downturn for centralized exchanges. Therefore, users are likely to consider DEXs or decentralized exchanges as an alternative to centralized exchanges. Most important of all, the growth of the DeFi movement serves viable implications for the adoption of decentralized exchanges.
DEXs have been designed as peer-to-peer marketplaces without any central authority. Decentralized exchanges do not have custody of private keys or data about orders of users, and all the transactions go through automatic execution through blockchain. In addition, DEXs do not need compliance with regulatory standards. Another significant highlight for decentralized exchanges refers to lower costs for transactions in comparison to CEXs. The difference between a centralized exchange and DEX is also evident in the use of smart contracts in decentralized exchanges. Furthermore, DEXs also feature sophisticated market-making protocols for guaranteeing substantial liquidity for faster execution of orders. For example, Automated Market Makers or AMM protocols could avoid the need for a conventional order-matching approach of centralized exchanges. On top of it, a pricing algorithm helps in defining asset prices on DEXs.
The differences between DEXs and centralized crypto exchange platforms show that both of them have advantages and setbacks. One of the significant highlights in favour of CEXs refers to the advantage of regulations. The regulatory aspect of centralized exchanges ensures better safety and transparency by ensuring that the exchange operates within the limits of the law. At the same time, it is also important to note that centralized exchanges offer better performance in comparison to DEXs. Market makers in CEXs offer liquidity to ensure an easier and more prompt exchange of assets. However, decentralized exchanges shine in terms of cheaper fees and anonymity of users.
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Important Traits of Centralized Exchanges
The debate between centralized and decentralized exchanges is an integral highlight of the existing crypto landscape. On the other hand, you could choose a platform from a centralized crypto exchange list by reviewing the facility of specific features. It is practically impossible to consider a specific crypto exchange as the best choice for every crypto user. You need to choose crypto exchanges which could cater to your specific goals. In the case of a centralized cryptocurrency exchange, you need to look for features such as user-friendliness and low costs. Some of the other important features of centralised exchanges include the facility of live market prices for cryptocurrencies listed on the exchange.
The factors for evaluating centralized exchanges also focus on the provision of liquidity alongside the efficiency of the markets. It is also important to verify that the trading platform maintains consistent activity and follows best practices for security. What are the most important factors for choosing a centralized cryptocurrency exchange?
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Trading Volume
A detailed understanding of ‘how do centralized crypto exchanges work’ can help you find out the importance of trading volume in centralized exchanges. Higher trading volume translates to lower volatility and market fluctuations, thereby restricting the possibilities of market manipulation on CEXs. Volatility is an important concern for cryptocurrencies. Since the time required for completing transactions is considerably larger, the price of a specific coin or token could change between the time of initiating and completing transactions. Higher trading volumes could ensure faster transaction processing, thereby avoiding the impact of fluctuations.
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Security
Another striking aspect which determines the usability of a Centralized Crypto Exchange (CEX) is security. The custody of assets in a centralized platform creates a vulnerable target for security breaches. It is important to understand that you cannot find a cryptocurrency exchange with 100% immunity against hacks and fraud. However, some centralized exchanges have a better security infrastructure in comparison to others. For example, the difference in security on CEXs depends on how exchanges would react to security breaches. In the past, some centralized exchanges have worked hard to recover user losses with varying results. On the other hand, some centralized exchanges collapsed as a result of security vulnerabilities.
Renowned Centralized Crypto Exchanges
The options for blockchain programmability have ensured that almost anyone could develop a cryptocurrency exchange. Most of the popular cryptocurrencies have users worldwide, and they are decentralized assets. You can choose centralized exchanges for purchasing or selling crypto assets with proper knowledge about cryptocurrencies. On the other hand, every entry in a centralized crypto exchange list does not serve as the best option for all users. The best course of action for choosing centralized exchanges would focus on exchanges with good reputations. Here is an outline of the popular centralized crypto exchanges you can find now.
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Coinbase
The most popular entry among examples of the best centralized crypto exchange would be Coinbase. It is one of the most commonly used centralized exchanges in the United States. Interestingly, the CEX is a massive, publicly-traded company with its stocks listed for trading. At the same time, the platform ensures desired usability for beginners as well as new crypto traders. However, the transaction fees could be accounted as one of the foremost setbacks of Coinbase.
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Binance
Another notable mention among renowned centralized crypto exchanges refers to Binance. It is the biggest cryptocurrency exchange in the world and has come up with Binance.US as a subsidiary for operating in the United States only. Binance.US would work in accordance with the securities and trade laws of the United States.
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Kraken
The next popular choice in a centralized crypto exchange list is Kraken. One of the most noticeable highlights of Kraken is the assurance of low fees. In addition, Kraken also supports a broad range of cryptocurrencies alongside offering a robust rewards program. However, Kraken is a suitable option for intermediate and expert cryptocurrency traders.
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Gemini
The list of renowned centralized crypto exchanges also includes Gemini. It is one of the largest crypto exchanges and has its own stablecoin. Apart from the reputation of its stablecoin, Gemini also features trusted rewards programs. While Gemini offers significant advantages for crypto transactions, it imposes the burden of high costs.
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How Can You Use a CEX?
The highlights of a guide on Centralized Crypto Exchange (CEX) and their working must also showcase the methods for using them. Beginners can use the following steps to interact with a centralized exchange.
Step 1
Start with a review of the top exchanges on the basis of transaction fees, supported cryptocurrencies, security features and trading volumes.
Step 2
Based on your understanding of ‘how do centralized crypto exchanges work‘, you have to create an account on the CEX. You can create the account by using your email and setting a unique password. Subsequently, you must complete the KYC verification steps for offering your personal information to the exchange.
Step 3
In the next step, connect the wallet to the centralized exchange and transfer funds to the CEX. The wallet is an important part of paying and receiving cryptocurrencies through the CEX.
Step 4
Once you set up the wallet on the centralized exchange, you can begin your first transaction. Make sure that you check the crypto token before purchasing.
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Final Words
The introduction to centralized crypto exchanges provides a clear glimpse of their potential. Most of the discussions around centralised crypto exchanges revolve around the concerns of centralization. However, decentralized crypto exchanges operate without any regulatory influence. Therefore, the consistent expansion of the centralized crypto exchanges list could open up more roads for crypto adoption. Furthermore, there are many other factors which validate the choice of a centralized exchange. With better transparency, centralized exchanges could achieve improved adoption rates in the future. Learn more about CEXs and their role in the domain of cryptocurrencies now.
*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!
