Review: Centralized Exchanges
Since the launch of Bitcoin in 2009, there have been various platforms known as exchanges that manage the trading of cryptocurrencies for other assets; these exchanges act as an intermediary between the buyer and a seller. According to Satoshi Nakamoto, he created Bitcoin to defeat the centralization of finance.
In this article, we will review everything about centralized exchanges. Let’s begin!
Centralized Exchange Overview
This type of exchange carries out the role of a middleman, popularly known as a third party between a buyer and a seller in the cryptocurrency market. They are usually operated and controlled by a company; hence, they mostly have high reliability. Most of the crypto transactions are processed by centralized exchanges.
https://twitter.com/amr_tawfik160/status/1464935550981394440?t=orx-qJFtgUFQIVoja9-Jdg&s=19
The first case of cryptocurrency exchanges can be traced down to 2010. Bitcoin developer Gavin Andresen designed a Bitcoin “faucet”. This is a website that distributes free Bitcoin. This exchange has played and will continue to play important roles in the cryptocurrency community and beyond. It has even influenced the decision of governments, businesses, and institutions around the world to accept cryptocurrency and infuse it into their transactions.
From when cryptocurrencies came to the limelight, over a decade ago, unregulated platforms became regulated. Regulation influences security and trust which are the backbone of the digital asset ecosystem. Many investors would rather choose CEXs when they intend to trade or hold cryptos.
Examples of these centralized exchanges include Binance, Huobi Global, Coinbase (Pro), Kraken, Bitfinex and KuCoin, etc
Centralized Exchange Features
Services offered by Centralized Exchanges include the following:
Cryptocurrency Trading
On Centralized exchanges, there are different options through which you can buy and sell cryptocurrencies. One is a market order, an option to buy or sell cryptocurrency instantly at the market price.
The other is a limit order. It allows you to set a specific price at which, when the market value hits that price, you’d want to buy or sell an asset. The order is executed once the price of the asset reaches your set price.
There are also trading tools for professional traders, including leveraging and margin trading etc. Centralized exchanges collate orders from their users. It uses special software to match and execute the matching corresponding buy and sell orders.
Storage Medium
Centralized exchanges have a platform, a digital wallet, where crypto users can store their cryptocurrencies. Choosing to store your cryptocurrency on an exchange means putting total trust in the exchange to keep the private keys and funds secure. Most centralized exchanges have proper security measures in place to protect their user’s funds. Some of them even offer custody services for financial institutions and investment firms who invest in cryptocurrency by storing their assets that are in cold storage.
Password Recovery
CEX uses KYC and verification processes which are influenced by how much information the user is willing to drop about themselves. It is notable that the more information provided, the higher the withdrawals and transactions that can be carried out on the centralized exchanges. If a verified user forgets their password or encounters any technical error during transactions, they can easily access the customer care unit.
Liquidity
Centralized cryptocurrency exchanges have more liquidity supply compared to their alternatives. Multiple users make their orders according to market trends which in turn affects its liquidity supply. In turn, the law of demand and supply takes place. Different users sell and buy per the market situation. Its liquidity is also supplied by market makers. Liquidity is the ability of a crypto asset to be able to be converted into either cash or other cryptocurrencies. Liquidity is very important, as it makes a crypto exchange less vulnerable to market manipulation.
Pros and Cons of Centralized Exchanges
Pros of Centralized Exchanges
High Trading Volume and High Liquidity: The higher the trading volume, the higher the liquidity supply. Centralized exchanges are remarkably popular amongst crypto users hence they have a lot of active users who trade their assets. This causes high trading volume which affects the high liquidity as well.
Fiat-cryptocurrency Trading and Vice Versa: Centralized Exchanges permit the exchange of fiat currency to crypto on and off-ramps. People can start their crypto journey easier as all they have to do is load their fiat wallet with funds that they can exchange for cryptocurrencies.
High Level of Functionality: Although centralized exchanges are known to function as a crypto trading platform, they have other functionalities. They include margin trading, crypto derivatives trading, exchange staking, and margin lending.
User-friendliness: Its interface is quite easy to understand especially for crypto newbies. It’s usually easy and uncomplicated to access the respective trading options on the platforms. They provide user-friendly and easy-to-use platforms which are active on both websites and apps making transactions comfortable at any point in time.
Reliability: Due to the many experiences of different users on cryptocurrencies, reliability is an important concern for most investors and traders. This is because cryptocurrency is a different environment which is quite different from traditional bonds and stocks. This is done by providing extra layers of security, depending on the platform, a reliable platform for transactions and trading.
Fast Transaction: Centralized exchanges can process every transaction speedily and almost in real-time. Traders can react directly if they notice any unfavourable change in the market. This is made easy because centralized exchanges are managed by a centralized organization that can process thousands of orders per second.
Demerits of Centralized Exchanges
After exploring the merits of centralized exchanges, let’s look into their downsides. They are as follows:
Hacking Risk: Centralized Exchanges are managed by companies or organizations. These organizations are responsible for the holdings of their customers. These exchanges store their users’ crypto assets. They also have integrated wallets as part of the services they render to their users. This service is known as custodial services. This makes them highly vulnerable to hacking risk or cybersecurity risks.
Transaction Fees: These exchange platforms charge a decent amount of fees on the minimal services they provide. These charges are not taxes because trading cryptocurrency differs from trading equity. The charges are directly imposed by the centralized exchanges as a form of an important financial cost for maintaining the platform.
Government-regulated: Centralized Exchanges are controlled by regulators, third-party providers, and legal regulations. These regulations are to prevent the use of the platform for money laundering. Hence, its users are required to provide extensive data by filling in the Know Your Customer questionnaire (KYC). This regularity opposes why cryptocurrencies were created.
FAQ’s About Centralized Cryptocurrency
The Regulation of Centralized Exchanges
Depending on the jurisdictions they operate in, these types of exchanges are subject to the regulations based on the jurisdictions they are in operation. These regulations vary from jurisdiction to jurisdiction, such as KYC data collection and AML issues, which are made compulsory by federal law.
Why don’t I have to pay gas fees (and wait for confirmations) when trading on a centralized exchange, like Binance, Coinbase, or FTX?
Centralized exchanges use “off-chain” order books to manage their trades. It is not dependent on miners of a blockchain to validate transactions. The user gives the exchange full control of their funds; hence the exchange can essentially be likened to an “IOU” system. The exchange does not charge a gas fee to trade but rather, it charges its user a trading fee. This fee is recorded as the exchange’s wallet as profit. It also charges users a withdrawal fee on every transaction which includes moving their centralized exchange into their possession.
