What is CEX?

UniqArt
3 min readMay 27, 2022

A centralized exchange (CEX) is an exchange for cryptocurrencies controlled by a company that owns and manages it in a centralized manner.

Ex: Binance is a CEX

How does a CEX work?

The order book of a centralized exchange facilitates trades between users by collecting the buy and sell orders posted by different traders. Orders are requests to buy or sell a specific amount of a cryptocurrency at a certain price. CEXs take orders from their users and use software to match and execute the corresponding buy and sell orders.

Users of CEX do not trade crypto or fiat currency with one another. Instead, when they deposit funds on a stock exchange, the latter assumes custody of those assets and issues the trader a comparable number of IOUs (I Owe You). The stock exchange keeps track of each user’s IOUs as they pass through trades and only converts them to actual currency when funds are withdrawn.

Benefits of using CEX

CEX is custodial: Centralized exchanges are custodial is one of their most distinguishing characteristics. When users want to trade on a CEX, they must keep their funds in an exchange-linked wallet rather than in their wallet. What’s crucial is that the exchange, not the user, keeps the wallet’s private keys; instead, they receive platform login credentials.
On the surface, this appears to have certain advantages, particularly for new users who are still learning about the complexity of crypto.

Liquidity: Liquidity is abundant on centralized exchanges. They make trading more accessible by centrally matching users’ “buy” and “sell” orders, often known as an “order book” system. This means that liquidity is determined by the number of buys and sell orders on the books. Centralized exchanges can offer incentives to large-volume traders who provide liquidity to their order books, further strengthening this structure. Because most people’s first forays into crypto occur on a centralized exchange, order volumes are always higher than in decentralized exchanges.

Potential Downsides:

Entry restrictions: One of the significant downsides of CEXs, as with any centralized business, is the exchange’s entry hurdles. This can take several forms: a user may be trying to trade a specific currency but cannot do so because the stock exchange has chosen not to integrate that coin, or a user may live in a country where particular services are unavailable. In either situation, users are limited to the access allowed by the platform because the exchange’s decision-making power is centralized.

Lesser Opportunities: Since this form of exchange decides which currencies and tokens to include, the options may not necessarily match what users want to view or interact with. NFTs, for example, is a popular trading commodity that has only recently been incorporated on Binance and Coinbase.

(written by Catherine S Thomas)

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