What is a centralized crypto exchange (CEX)?
A centralized crypto exchange (CEX) is a business that provides you with a multitude of services such as a crypto trading platform (buy and sell transactions), account services (account funding and withdrawal), and customer support services.
Centralized exchanges remain the most widely used method to buy and sell crypto.
They are attractive to many crypto users since they are considered to be more convenient and easier to use than a decentralized exchange (DEX).
What is a Centralized Crypto Exchange (CEX)?
A centralized exchange (CEX) allows any person with an internet connection to discover and transact with crypto assets.
It is owned and operated by a private company and requires users to sign up and open an account in order to participate.
CEXs facilitate transactions of crypto assets between buyers and sellers. by providing an online trading platform that maintains an order book: a collection of buy and sell orders posted by individual traders.
Orders are requests to buy or sell a certain amount of a specific cryptocurrency at a specified price.
A CEX aggregates orders placed in the order book by its users and then uses special software to match and execute the corresponding buy and sell orders.
Examples of centralized exchanges include Binance, Coinbase, Bybit, Gemini, Kraken, and Kucoin.
What does a Centralized Crypto Exchange (CEX) do?
A cryptocurrency exchange has three primary roles:
Order Matching
In a crypto exchange, buyers and sellers transact with each other. This means that you buy crypto from another user of the exchange rather than from the exchange itself.
The exchange itself provides a PLACE for people who want to buy crypto AND for people who want to sell their crypto. It matches buyers and sellers.
If a buyer wants to buy bitcoin (BTC) at $20,000 and a seller wants to sell bitcoin at $20,000, the exchange matches the orders of these two people.
Clearing Counterparty
The exchange also acts as a central clearing counterparty.
This is just a fancy way of saying that all matched orders appear to be against the exchange ITSELF rather than between the users directly. This provides anonymity for both parties since the buyer won’t know who the seller is and vice versa.
Also, as the central clearing counterparty., the CEX handles the entire process of the transaction and ensures that all obligations are met between buyer and seller and that the transaction actually completes.
For example, if you bought 1 bitcoin (BTC) for $20,000, the exchange ensures that you have $20,000 (USD) and that USD is transferred to the seller’s account and the newly bought BTC is transferred to your account.
You can’t just take the bitcoin and disappear, and the seller can’t take your U.S. dollars and disappear (and keep their bitcoin).
Custodian
The exchange also acts as a custodian for any cash and/or crypto held in your account.
Some exchanges allow you to deposit fiat currencies, such as U.S. dollars or euros, while others only allow you to deposit cryptocurrencies like bitcoin (BTC) or ether (ETH).
Whether it’s fiat or crypto, once deposited, they are under the custody of the exchange. This means that you’re now trusting the exchange to keep your funds safe the same way you’d trust a bank’s vault to hold your money.
Now that you’ve learned what a centralized crypto exchange (CEX) is, let’s learn how to choose a good one.
