What is a Centralized Exchange? (CEX)

Created by Ethos Support, Modified on Fri, 24 May 2024 at 11:32 AM by Ethos Support

A centralized exchange (CEX) is a type of cryptocurrency exchange that operates as a third-party intermediary between buyers and sellers of digital assets. In a centralized exchange, the exchange platform holds custody of users' funds and facilitates trading through a centralized order matching system. Here are some key features of centralized exchanges:

Custody of Funds: On a centralized exchange, users typically deposit their cryptocurrency funds into accounts controlled by the exchange. The exchange maintains custody of these funds, and users trade with each other through their accounts on the exchange platform.

Order Matching: Centralized exchanges use a centralized order matching system to match buy and sell orders from users. When a buyer and seller agree on a price, the exchange executes the trade and updates the balances in the users' accounts accordingly.

User Interface: Centralized exchanges provide user-friendly interfaces for trading cryptocurrencies. These interfaces often include features such as market charts, order books, and trading pairs, allowing users to place buy and sell orders with ease.

Liquidity: Centralized exchanges typically have higher liquidity compared to decentralized exchanges (DEXs) because they pool orders from multiple users into a central order book. This liquidity allows for faster order execution and tighter bid-ask spreads.

Regulation and Compliance: Many centralized exchanges operate under regulatory frameworks and compliance standards, depending on the jurisdiction in which they operate. They may require users to undergo identity verification (KYC) and adhere to anti-money laundering (AML) policies.

Security Risks: Centralized exchanges are susceptible to security risks such as hacking, theft, and insider attacks. Since the exchange holds custody of users' funds, a security breach or compromise of the exchange's systems could result in the loss of users' assets.

Examples: Some well-known centralized exchanges include Binance, Coinbase, Kraken, and Bittrex, among others. These exchanges offer a wide range of trading pairs, liquidity, and features to cater to the needs of cryptocurrency traders and investors.

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