What Is Centralized Exchange (CEX)?

Banks, central bank, stock/crypto exchanges. Most things about finance used to be centralized exchanges, also known as CEX.

Learn more about what is CEX and how CEX has shaped the financial landscape as we know it.

Before crypto came to the world, exchanges or any financial platform were centralized. It has been this way of doing businesses as far as the first conception of banks. So it is no wonder that the moment we have a crypto market, the next extension of the market would be having centralized exchanges to help people move and swap cryptocurrencies. 

“Swap is a process of exchanging one cryptocurrency for the desired cryptocurrency”

Centralized crypto exchange (CEX) works in a traditional way of trading. Basically, you deposit your funds, either in fiat or cryptocurrency, to the exchange platform to handle the trading for you.

This means that you gave up your control over your funds to them to execute the transactions on the blockchain network. On the user side, it may seem that users have control over the funds but in the blockchain network, the funds are actually controlled by the custodian of the exchange platform. 

What Is Centralized Exchanges (CEX)?

“Centralized exchange (CEX) are exchanges that have central entity that facilitate cryptocurrencies trading, swapping, or exchange on behalf of the users on the blockchain by being the custodian of the users’ funds”

You can know if the exchange platforms are centralized by checking if they give you the private keys to your wallet in the platform and executing the transactions without you signing using private keys. If that is the case, the wallets that are in that platform are considered to be custodian wallets.  

“Custodian wallets are crypto wallets that are held and custodied by third party by holding the private key to perform any transaction on behalf of the wallet’s owner”

This approach does have its perks. Due to the blockchain system, CEX can execute the trading at a faster rate and help streamline the platform operations. On the user interface side, it is a pleasant experience for the users to interact as it involves less steps and more freedom for the developers to create better UI.

The cost here would be giving up the control of your funds. This creates new risks to the users such as the funds being drained by the platform provider or stolen by hackers or loss of private keys due to human error in CEX operations. These are not extraordinary situations.

Numerous incidents have happened in the past from centralized exchange. One of the most famous and expensive losses is Mt. Gox cryptocurrency exchange hacks, where almost 850,000 Bitcoin were missing and stolen, the amount around 450 million USD at the time. 

Some of the famous centralized exchange are Luno, Coinbase, and Binance

Top centralized exchanges by 24 hour volume in Coinmarketcap website. Kredit: Coinmarketcap.com

Example of Centralized Exchange in Cryptocurrency

Luno

Luno’s headquarter is in the United Kingdom and operates in numerous countries such as Malaysia and Australia.

Coinbase

Coinbase is one of the biggest CEXs, headquartered in the United States and their works in more than 100 countries.

Binance

Binance is the biggest crypto exchange in the world with average daily trading well above 1 trillion USD. Binance was headquartered in China but then they moved to Cayman Islands due to tightened cryptocurrency regulations in China.  

What happened when CEX get too powerful?

CEX has been a wonderful tool for crypto users and traders out there but this does not resonate with the idea of decentralization. What happens if these CEXs are controlled by the governments or worse, a group of billionaires that may have power over monetary policies of cryptocurrencies through CEXs.

Now with smart contracts, a movement was formed to help alleviate decentralization by creating tools that are by nature decentralized, trutless, and open to everyone. This led to creation of  Decentralized Exchanges (DEX).

Key Takeaways

  • Centralized Exchange (CEX) are exchanges that have central entity that facilitate cryptocurrencies trading, swapping, or exchange on behalf of the users on the blockchain by being the custodian of the users’ funds.
  • Custodian wallets are crypto wallets that are custodied by third party by having access to the private key to perform any transaction on behalf of the wallet’s owner.
  • Swapping is process of exchanging one cryptocurrency for the desired cryptocurrency.

 

Do you use centralized exchange like Binance, Luno or Coinbase? Let us know your thoughts on CEX.

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