What is a Centralized Exchange

Centralized exchanges (CEX) are online platforms for trading cryptocurrencies. Unlike decentralized exchanges (DEX), which operate without a central governing body, CEX are controlled by a single organization or company. They act as intermediaries between buyers and sellers, providing services for order matching, fund storage, and trading operations. CEX offer a familiar interface, allowing users to create accounts, deposit funds, place orders, and execute trades. Security measures, including authentication and encryption, are implemented to protect assets and user data.

How Centralized Exchanges Work

Centralized exchanges use an order book system to match buy and sell orders from users. After creating and verifying their account, users deposit cryptocurrency or fiat funds into their wallets on the exchange. When placing an order, users specify the amount, price, and type of cryptocurrency they wish to buy or sell. The exchange's order matching system finds corresponding counterparties to execute trades.

CEX hold users' assets, which creates a risk of loss due to hacks or cyberattacks. Despite security measures, exchanges remain vulnerable to cyber threats, sometimes resulting in the loss or theft of funds. Additionally, CEX often require users to undergo KYC (Know Your Customer) procedures, which involve providing personal information to comply with regulatory requirements, raising privacy concerns among users.

In conclusion, centralized exchanges play a key role in the cryptocurrency market by offering a user-friendly interface and liquidity. However, their centralized nature raises concerns about security, fund storage, and user privacy, distinguishing them from their decentralized counterparts.

Example of How a Centralized Exchange Works

Scenario: John's Cryptocurrency Trading on a Centralized Exchange

John, a cryptocurrency enthusiast, decides to exchange his bitcoins for ethereum through the centralized exchange "CryptoX". The process looks as follows:

  1. Account Creation and Verification: John registers on "CryptoX", provides his email, creates a strong password, and completes the necessary identity verification process. This includes submitting documents and undergoing KYC procedures to meet regulatory standards.
  2. Funding: After verification, John goes to his account on "CryptoX" and initiates a deposit. He transfers his bitcoins from his personal wallet to the bitcoin wallet address provided by "CryptoX". The exchange confirms the deposit after the required number of confirmations on the network.
  3. Placing an Order: Once his bitcoin deposit is confirmed, John navigates to the exchange's trading platform. He selects the trading pair – bitcoin to ethereum – and places a "market order" to buy ethereum. In this case, John agrees to accept the current market price without specifying a particular price for the transaction.
  4. Order Matching and Execution: The order matching system of "CryptoX" quickly finds a corresponding sell order from another user willing to sell ethereum at a compatible price. The trade is executed, and John's bitcoins are converted into ethereum at the agreed rate.
  5. Post-Trade: After a successful transaction, the acquired ethereum appears in John's account on "CryptoX". He can either leave the ethereum in the exchange's wallet or withdraw it to his personal cryptocurrency wallet for added security.

About the Author

Vladislav Ch – Founder of the off-chain analytics platform for crypto assets Holder.io. Since 2017, he has been investing in IDOs and IEOs. His experience is validated by a blog on the Telegram channel.