What is a Centralized Exchange? Definition and example
A CEX, short for Centralized Exchange, is an online platform used to buy, sell and trade cryptocurrencies. Its business model is the same as the stock exchanges and permits exchange among cryptos (including stablecoins), fiat currencies, and other pairs of digital assets.
The idea behind this concept is “centralization”; using a middleman or third party to make secure transactions. Buyers and sellers rely on this centralized figure (similar to a bank) to handle their crypto assets, and the CEX makes money thanks to the transaction fees paid by the platform users.
Example of Centralize Exchanges
An example of CEX is Blockchain.com, founded in 2011 in the United Kingdom. It’s the most trusted and fastest growing crypto company with 37M verified users and is available in more than 200 countries.
With its 83M wallets created and around 1/3rd of bitcoin transactions, Blockchain.com offers different products and services such as:
Centralized Exchanges are essential marketplaces that function with an orderbook that, by simplifying, is a list of open buy and sell orders, consisting of prices and volumes. They match up buyers and sellers and announce current market prices based on the last price an asset sells for.
How to start using a CEX?
To start operating on a CEX, it is important to know and carry out the required checks to prevent criminal activities:
KYC (Know your Customer)
AML (Anti-Money Laundering)
CFT (Counter Terrorism Financing)
Take into account that the policy varies from CEX to CEX.
Secondly, you can open your account by filling in all the required fields and verifying your identity. Then you can deposit funds onto the exchange using a wire transfer, debit or credit card, or easily buy assets. Once your funds are in the wallet, you can start trading.
Using a CEX, you can buy and sell cryptocurrency in several ways. Placing a “market order” and buying or selling at the market price. Otherwise, placing a “limit order” setting a specific price. The order will execute when the asset's price reaches your set price. Additionally, some exchanges offer specific trading platforms for professionals with margin trading functionality.
Most CEXs have an API for crypto trading that allows you to connect with that exchange, giving you access to real-time market data, making trades, and managing your account. For example, considering Binance, the API is a method that allows you to connect to the Binance servers via Python and other languages and start to automate your trading. In particular, it has a RESTful API that uses HTTP requests to send and receive data.
In this article, you can find how to use a cryptocurrency API and a list of the best crypto APIs with in-depth reviews.
Pros and Cons of CEXs
Like DEX, also CEX has advantages and some disadvantages.
The best benefits of a CEX are surely the reliability and the structure of the user-friendly platform. If you are a beginner in the crypto industry, a CEX is the smartest choice that you can make; starting to operate with a simple and clear interface will allow you to better understand the general operations (e.g. deposit, earn, transfer). Relying on a CEX is useful when starting out because it allows you to deposit funds directly into the central exchange wallet without worrying about the enshrinement of your access keys. The CEX can maintain the private keys for you.
The success of an exchange depends on different factors, but the most important is trading volume.
“Generally speaking, the higher the levels of trading volume, the lower the volatility and market manipulation. The higher the trade volume and the faster the transaction can be processed, the less likely this fluctuation will be a problem.”
Among the most common downsides of a CEX, we can find:
the hacking risk; when you decide to operate with a CEX, it’s essential to research the security history of that exchange before entrusting your funds to the platform. Remember that no one exchange is immune to malicious activity.
the high cost of transaction fees used to the livelihood of that CEX.
Top Centralized Exchanges
There are many centralized exchanges that analyze them, and having an account open is difficult.
Here you can find a list of the top centralized exchanges ranking by trust score made by Coingecko.com
Are Coinbase, Binance, and Robinhood CEXs?
Yes, of course. They are the most famous and important, but in the top 10 for reliability, we can also find FTX, OKX, KuCoin, Kraken, Crypto.com, and Bitfinex.
Binance is the biggest cryptocurrency exchange in the world in terms of trading volume. It was founded by Changpeng Zhao, aka CZ. It was initially based in China, but after the restricted regulation on cryptocurrencies increased in that country, he decided to move the headquarters to the Cayman Islands. This CEX has also created “Binance Academy” an educational platform about blockchain technology, cryptocurrencies, and more.
Here is the Binance Academy’s beginner guide to exploring how functions Binance Lite.
Another important CEX is Coinbase which offers both centralized and decentralized services; the centralized custodial service is offered by Coinbase.com, one of the most trusted cryptocurrency platforms.
Its core feature is secure offline storage of digital assets protecting its 103M verified users. Getting started with Coinbase is easy; you only must create an account, link it to a bank account and start transactions.
In this article, you can easily compare Binance and Coinbase.
Robinhood is a pioneer in the no-commission brokerage model. Using it for beginners is easy and safe; they can invest in cryptocurrencies with zero commissions.
Here is an interesting article that compares Robinhood with other CEX crypto wallets.
Which cryptocurrencies are centralized?
Since each CEX has its own token, plenty of centralized exchange tokens (CET) are on the market. The 5 most popular are:
UNUS SED LEO (LEO)
FTX Token (FTT)
Here is the complete list made by Coinmarketcap.com about the top centralized exchange tokens by market capitalization.