TL;DR
CEX is an innovative platform that allows users to transact their crypto assets securely while serving as a trusted third party to the transaction. You can relate a CEX’s role to that of a traditional Bank. However, in place of physical cash, CEX allows safe transactions of cryptocurrencies. It is also a fact that Centralized Exchanges adopt the use of blockchain to proffer more innovative, traceable, and user-centered services.
Also, Centralized Exchange serves as the liquidity provider of any supported token on the platform, enhancing seamless transactions often characterized by large transaction capacity. A leading Centralized Exchange is the Binance Exchange, leading the top CEX chart with 56.8M monthly visits at the time of writing.
What is CEX?
Centralized Exchange (CEX), as its name implies, refers to an exchange created to provide a platform for safe crypto transactions. Hence, its importance cannot be overemphasized in the crypto space today. Unlike Decentralized Exchanges, where operation is highly decentralized, a centralized exchange is owned by a private entity, serving the role of an intermediary between crypto traders (buyers and sellers).
How does it work?
CEX as a middleman
The central role of a CEX is the facilitation of crypto transactions. Centralized Exchanges act as the middle between buyers to establish trust in the transaction. Users are often connected on the platform through an Order Book. So when a seller or buyer initiates a transaction, an Order Book is created, connecting the Marker and Taker and eventually completing the transaction. Each user has a distinct order history to trace past transactions, and it usually contains details like the date, the amount traded, and the price of the crypto asset at the time of the transaction.
No Private and Public Keys
If you are an avid crypto trader, there is a chance that you have multiple private and public keys to some of your Decentralized Wallets. A leading feature of CEX is that there are no private or public keys; hence, crypto assets are stored solely with the exchange. This grants the exchange limitless control over your cryptocurrencies, and as a result, crypto traders are often concerned with trading on a trusted CEX. There is also a trust score ranking to determine trusted Centralized Exchanges.
While the level of control CEXs have over users’ assets has created reasonable fear in the past, recent practice has gone beyond the use of trust score to adopting a transparency dashboard where the amount of assets, clean assets, auditor and last audit date are provided to the public to instill trust and show CEXs performance.
Liquidity Provider
As mentioned earlier, Centralized Exchanges serve as liquidity providers for all the assets provided. While this exchange also comes with innovative investment approaches like DeFi staking and Yield Farming, these are ways of increasing liquidity and ensuring seamless transactions regarding listed coins.
Highly Secure Custodial Wallet
While trading on a Centralized Exchange essentially means depositing your asset into the platform’s reserve without full ownership right of your wallet, one benefit of CEX is a high-level security system that protects users’ assets from sudden theft. For instance, an exchange like Binance comes with login details, a 2FA procedure, a security code and Fund Password. This shows that even with access to your mobile, no one can carry out transactions without the Fund Password.
Even better, platforms like Gate.io have superior security systems, including a Captacha code or task to log in, a password, 2FA, and Fund Password. It also uses Google Authenticator as an extra layer of security system when resetting passwords.
KYC Requirement
Another process required to use a Centralized Exchange is the Know-Your-Customer Procedure, which requires significant private information. This is a vital step that helps most CEXs comply with local legislation. Users are often asked to provide information like legal names, Date of Birth, Mobile Number and ID verification to complete a reasonable level of KYC and access the exchange’s full function.
Pros
- Effortless traceability
- High-level security of wallets
- Responsive customer service
- Easy-to-use interface
- Large liquidity pool for transaction
Cons
- No anonymity
- Retains the use of Intermediaries in financial transactions
- Lost of actual ownership over the asset
- Local legislation creates multiple restrictions
- Sharp decline in trust
One of the leading questions regarding CEX’s operation is whether these platforms truly represent Blockchain and Cryptocurrency.
However, the answer to this is somewhat unclear. The use of Centralized Exchange to facilitate crypto transactions without border limitation and the adoption of blockchain to offer users a more sophisticated and highly-digitized financial experience answers the question above affirmatively. However, given some of the features of CEXs mentioned earlier, one can easily disagree with the above answer.
Conclusion
Conclusively, the introduction of Centralized exchanges has created a superior alternative to the traditional financial system we had. While this financial tool operates with a semi-decentralized structure with notable centralized features, the ability to complete financial transactions within seconds, maintain reasonable levels of anonymity and swift borderless transfer of funds are some of the leading benefits among others.
