In the context of cryptocurrencies, centralized exchanges are platforms where you can buy and sell cryptocurrencies. You can do this either using fiat money, such as euros or dollars, or using other cryptocurrencies, usually Bitcoin and Ether.
You can think of them as middlemen who make sure that transactions go smoothly. The existence of this middleman is also why the term “centralization” appears in their name.
Centralized Exchange (CEX)
Some of the characteristics of cryptocurrencies are privacy, security, decentralization, and no need for trusted third parties. Exchanges are non-private, centralized platforms where funds are managed by third parties that we expect to be secure and reliable.
Centralized exchanges rely on trusted third parties, who mediate the trading of the platform’s users. To access these platforms, you need to pass the “know your customer (KYC)” and “anti-money laundering (AML)” checks. Not only this, but exchanges often share information with the tax authorities of different countries. Regarding security, here we must trust that they have good security measures.
Those who manage the exchange are also the ones who set the commissions to be paid on the platform to carry out transactions. Part of these commissions is used to pay the transaction commission to the network, part for the maintenance of the platform and the rest are profits. Additionally, exchanges usually establish a minimum for the purchase or exchange of cryptocurrencies, as well as minimums for the withdrawal of cryptocurrencies.
How does a CEX work?
These platforms offer you the opportunity to trade cryptocurrencies. This means that, if someone wants to buy several ADA tokens using Bitcoin, someone has to sell ADA.
Many of these exchanges face some difficulties, as illiquidity may occur.
Such a transaction could not take place if no one on the platform sold ADA.
Types of transactions
Transactions on centralized exchanges can take place in several ways.
First, if you want to buy Ether, even right after registering on the platform, you can easily do so by placing what is called a market order. Through this, you transmit your intention to the CEX.
On the other hand, if you want to buy Ether once it reaches a certain value, you can place a limit order, where the platform will initiate the desired transaction when the price reaches that value.
There are also more complicated forms of trading, such as margin trading, but the first two mentioned are the most used today.
Some of the most important international exchanges are Coinbase, Binance, Bittrex, Poloniex or Kraken, among others. In Spain we have the platforms 2gether, Bit2me and Bitnovo.
Advantages of centralized exchanges
- The interface is very easy to use
- They offer advanced options that allow for a wide variety of actions.
- They have great liquidity
- They allow cryptocurrencies to be purchased using fiat money.
Disadvantages of decentralized exchanges
- Centralized control
- No privacy for users
- The possibilities of hacking are quite high
- High transaction fees
- Cryptocurrencies are not owned by us, they are stored by a third party that we must trust.
Decentralized Exchange (DEX)
They are a type of exchange where there is no trusted third party. This type of platforms are usually developed on a blockchain through smart contracts, being most DEX deployed on Ethereum. As there is no trusted third party, exchanges are made directly between peers (P2P). Another advantage of having no trusted third party is that commissions are usually zero or close to zero.
There is no loss of privacy, since for these platforms it is not necessary to go through KYC and AML processes, you simply have to register. Remember at this point that the exchanges are also peer-to-peer, which ensures privacy.
Some of the best-known decentralized exchanges are Venice Swap, 0x, Waves, Uniswap, SushiSwap and Bitsquare, among others.
In the new world order, centralized exchanges have become quite feared. One of the latest examples is the FTX exchange. As you will see in this news article “Sam Bankman-Fried steps down, FTX files for bankruptcy“. You should protect your privacy and especially your funds. That’s why you should avoid from the centralized exchanges because they are too risky. Use a decentralized exchange such as Venice Swap and keep in safe your funds from the risks.