Centralized cryptocurrency exchanges (CEX) are exchanges owned and controlled by a principal party. The third party in control of such an exchange facilitates transactions on the platform and secures the assets of its users.
The Long Explanation
Cryptocurrency exchanges are platforms through which cryptocurrencies can be traded or swapped for other assets or transferred to other users. While there are both centralized and decentralized exchanges, centralized exchanges have come to play a crucial role in the crypto industry.
Centralized exchanges are run by an active third party who maintains an order book – a collection of orders to buy and sell specific currencies that have been posted by individual users.
Buyers and sellers are matched using this order book, with the exchange making its money through transaction fees and commissions. But CEXs don’t actually exchange crypto or fiat currencies with each other.
Operations within a CEX are more like those of a bank. When funds are deposited into a CEX, the exchange takes control of those assets and issues an IOU to the trader. This IOU is internally updated each time currencies are exchanged, and is only converted to cash at the time of withdrawal.
The middle man setup of CEXs promises a certain level of security, with the central party responsible for the funds and assets in its custody. The high trust index associated with these platforms and ease of transactions on them, saw them hit a trading volume of $14 trillion in 2021.
Despite this, the concept of centralization is considered antithetical to the world of cryptocurrencies which is often sold on the basis of decentralization.
Exchanges run by a single party grant full control to the exchanges who control users’ activities on their platform – a concept seemingly abhorred by crypto enthusiasts. Centralized platforms may also conduct malicious practices such as price manipulation and wash trading.
Importantly, CEXs present an easy target for hackers (both internal and external) and government regulators. Whereas the former finds them to be an attractive pot for successful attacks, regulators can censor and control these platforms. They may even force them to reveal a user’s identity.
Examples of Centralized Exchanges
Some examples of centralized exchanges include:
