In the cryptocurrency market, exchanges are categorized into two types of centralized (CEX) and decentralized (DEX). Currently, centralized exchanges dominate a larger share of the market.
These platforms offer optimal speed and user interface conditions for traders. However, trading on a centralized crypto exchange comes with risks such as hacking and lower privacy compared to decentralized exchanges.
What Is a Centralized Exchange (CEX)?
A centralized exchange (CEX) is a platform that acts as an intermediary, enabling the buying and selling of cryptocurrencies. In a centralized exchange, user assets are held in custody, and the platform manages trades.
Additionally, identity verification (KYC) is mandatory on most centralized exchanges due to the strict oversight imposed by regulators to prevent security abuses.
Key Features of a Centralized Crypto Exchange
These platforms aim to improve trading speed and asset security through features such as a trading engine and user management system.
Trading Engine
In a centralized exchange (CEX), the trading engine is responsible for executing buy and sellorders. This engine processes trades with minimal delay, calculates the best available price, and completes the transaction.
User Management System
This system handles processes like registration, identity verification, and security checks.
Features such as two-factorauthentication (2FA), biometric login (e.g., fingerprint recognition), and account recovery options contribute to enhanced asset security for users.
Simultaneous Use of Hot and Cold Wallets
Most centralized crypto exchanges use both hot and cold wallets to store user assets.
Cold wallets, being offline, offer higher security and are used for storing large amounts of capital. In contrast, hot wallets facilitate quick deposits and withdrawals of cryptocurrency.
Support for Payment Gateways
Centralized exchanges (CEX) support various payment methods, including bank cards, wire transfers, and online gateways.
These options enable users to purchase cryptocurrencies using fiat currencies such as USD, EUR, GBP, and others.
Regulatory Compliance in Operating Jurisdictions
Centralized exchanges (CEX) must operate under the supervision of legal authorities.
Processes such as KYC verification, anti-money laundering (AML) policies, and full transaction monitoring are mandatory to comply with jurisdictional regulations.
Advantages of Centralized Exchanges (CEX)
Due to their centralized structure, centralized crypto exchanges offer advantages such as high liquidity and a user-friendly interface.
High Liquidity
Centralized exchanges benefit from a large user base, enabling them to maintain sufficient capital for high liquidity. This feature allows for quick transactions at stable prices.
User-Friendly Interface
Centralized platforms offer intuitive and straightforward designs. With the help of various educational resources, they make using the platform easier.
In addition to these, centralized exchanges offer services such as mobile applications and integrations with advanced charting tools, including TradingView, which enhance the overall trading experience.
Customer Support
Despite having a simple and accessible interface and educational resources, traders often face questions regarding how to execute trades.
Most centralized exchanges offer 24/7 online support, enabling users to navigate the platform and resolve issues efficiently.
Diverse Financial Services
Over time, centralized exchanges have expanded their services beyond basic crypto buying and selling.
They now offer margin trading, staking, futures contracts, and crypto lending contributing to portfolio diversification.
Disadvantages of Centralized Exchanges (CEX)
Centralized exchanges operate contrary to the core philosophy of blockchain, which promotes the decentralization of financial systems. This contradiction introduces certain disadvantages, explained below:
Hacking Risk
There is always a possibility of cyberattacks targeting the technical systems of centralized exchanges. Even well-known platforms are not immune.
For example, the largest cyberattack on centralized exchanges was the Mt. Gox hack, during which $480 million worth of Bitcoin was stolen.
Full Access to User Assets
The operators of centralized exchanges have access to users’ private keys and assets. This access allows them to freeze accounts, transfer funds, or modify user balances under specific circumstances.
High Fees
Most services on a centralized exchange (CEX) involve various fees either direct trading fees or hidden costs deducted from the user’s balance.
These costs may vary depending on market conditions and often increase during periods of high volatility.
How Centralized Crypto Exchanges Work?
A centralized exchange is responsible for matching orders and fulfilling obligations between buyers and sellers.
This process begins with order placement in the order book and concludes with the settlement of funds between the parties.
With a large user base and high trading volume, centralized crypto exchanges provide ample liquidity for executing trades. Orders placed by users fall into two categories:
- Limit Order: A trade executed at a specific price defined by the user;
- Market Order: A trade executed at the current market price, processed immediately.
Another core responsibility of a centralized exchange is to provide proper security for transactions. This is ensured through two-factor authentication (2FA), data encryption, and cold wallet storage of assets.
Differences Between Centralized (CEX) and Decentralized (DEX) Exchanges
Unlike centralized exchanges (CEX), a decentralized exchange (DEX) is not governed by a single entity. Instead, all activities on a DEX are managed by smart contracts and conducted on the blockchain.
Comparison Between Centralized (CEX) and Decentralized (DEX) Exchanges:
Comparison Criteria | Decentralized Exchange (DEX) | Centralized Exchange (CEX) |
Management & Control | Governed by smart contracts without a single controlling body | Managed by a central company or institution |
Security | Assets held in private wallets; subject to smart contract risks | Assets stored on the exchange; subject to hacking risks |
Liquidity | Limited; suitable for medium-volume trades | High; suitable for large-volume trades |
Speed | Dependent on blockchain transaction speed | Instant order execution |
Privacy | Anonymous; no personal data required | Requires identity verification (KYC) |
Guide to Choosing a Centralized Crypto Exchange
To make an informed decision when selecting among centralized exchanges, it is essential to evaluate key factors such as security, fees, asset variety, user interface, and liquidity.
Exchange Security
To assess the security of a centralized exchange, the following factors should be reviewed:
- Activation of two-factor authentication (2FA)
- Storage of user assets in cold wallets
- Encryption of sensitive data
- Compliance with regulations in the jurisdiction of operation
Transaction Costs
In addition to trading fees, most centralized exchanges charge various service-related costs. These may include:
- Spread differences;
- Deposit and withdrawal fees;
- Slippage charges are deducted from the user's account.
Variety of Cryptocurrencies and Supported Networks
Before registering and starting to trade on a centralized crypto exchange, you should verify the availability of desired cryptocurrencies and the blockchain networks supported for withdrawals.
In some cases, a currency may be available for trading, but no withdrawal network is supported yet meaning it can only be held on the exchange.
Top Centralized Crypto Exchanges
Many centralized exchanges are currently active in the cryptocurrency market. The following platforms stand out due to their high trading volume and large user base.
Binance Exchange
Founded in 2017, Binance is one of the older centralized exchanges. It is registered in 18 different jurisdictions worldwide and provides services to over 150 countries.
Binance offers a wide range of services, including spot, futures, and margin trading, supporting over 150 different cryptocurrencies.
Bybit Exchange
Bybit offers 12 distinct user levels, enabling the platform to monitor user activity and enhance overall security closely.
It also offers a diverse suite of services, including crypto loans, an AI trading assistant (TradeGPT), and crypto payment cards.
Coinbase Exchange
Coinbase is one of the few crypto exchanges listed on the NASDAQ stock exchange. It is regulated by central authorities such as the U.S. SEC, FinCEN, and the Central Bank of Ireland.
This American exchange offers features such as staking, copy trading, and 24/7 customer support, and supports trading for more than 11,750 assets.
Upbit Exchange
Upbit is the largest cryptocurrency exchange in South Korea and has earned a trust score of 100 out of 100 on the ScamAdviser website. The platform uses a multi-step identity verification process to enhance security.
Bitget Exchange
Bitget, based in Singapore, boasts over 45 million global users and a significant trading volume. It features a transparent fee structure and supports trading for over 700 cryptocurrencies, offering leverage up to 1:125.
MEXC Exchange
MEXC offers a vast selection of assets with more than 2,800 listed cryptocurrencies. For futures trading, the platform charges zero maker fees.
With its user-friendly interface, MEXC caters to both beginner and professional traders.
Conclusion
Centralized crypto exchanges dominate a significant portion of the cryptocurrency market by offering key features such as high liquidity, fast transactions, security, and user support.
Most centralized exchanges (CEX) now provide a wide range of financial services, including lending platforms, NFT marketplaces, and high-leverage futures trading, which help diversify users’ portfolios.
However, using a centralized exchange also comes with risks, such as hacking threats, asset freezing by platform operators, and hidden transaction fees.
A wise approach is to choose a centralized exchange carefully by evaluating factors such as security, fees, and regulatory compliance, thereby minimizing these risks.
