In this article, I will briefly explain what centralized exchanges are and how they work.
We will also take a quick look at some of the advantages and disadvantages of this type of exchange, and I will give a few examples so that everything is clear.
What Are Centralized Exchanges?
In the crypto context, centralized exchanges are platforms on which you can buy and sell cryptocurrencies.
You can do this either using fiat coins, like euros or dollars, or using other cryptocurrencies, most of the time, Bitcoin and Ether.
You can think of them as intermediaries, which ensure that the transactions are carried out normally.
The existence of this intermediary is also the reason why the term “centralization” is included in their name.
How Does a CEX Work?
These platforms give you the possibility to trade cryptocurrencies. This means that if someone wants to buy a number of ADA tokens using Bitcoin, someone has to sell the ADA.
Many exchanges of this type face some difficulties, as a lack of liquidity may occur.
That transaction would not be able to take place if no one on the platform sold ADA.
Transaction Types
Transactions on centralized exchanges can take place in several ways.
First of all, if you want to buy Ether, even after you register on that platform, you can easily do it by placing what’s called a market order. By doing so, you pass on your intention to the CEX.
Instead, if you want to buy Ether once it reaches a certain value, you can place a limit order, in which 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.
Advantages of Centralized Exchanges
These platforms open the door to the crypto market for most investors.
They benefit from liquidity and a large trading volume.
Also, they are often very safe since they require users to prove their identity using official documents.
Disadvantages of Centralized Exchanges
New CEX platforms on the market may suffer cyber attacks that endanger the users’ funds.
However, this is not valid for large platforms such as:
- Binance
- Coinbase
- Kraken
- Crypto.com.
These platforms have security teams that make sure everything works properly.
On the other hand, many centralized exchanges have been accused of market manipulation and insider trading, using information that is not publicly available.
To conclude, although there are also decentralized exchanges, centralized exchanges remain the main trading method used by today’s crypto investors.