Centralized Exchange (CEX)
What is a Centralized Exchange (CEX)?
A Centralized Exchange, or CEX are centralized trading platforms, such as Coinbase or Binance. They offer a place to directly exchange FIAT currency as well as cryptocurrency into other cryptocurrency assets. These platforms are most users’ first experience of the world of crypto. However, being a centralized entity they have to operate in a few distinct ways from how a DEX would, the key points being:
- Know Your Customer (KYC) requirements.
- Custodial Wallets (Not your Keys, not your coin).
- Strict listing requirements for assets
- Centralized Liquidity
- High trading and withdrawal fees
Let’s take a look at each of these in detail
KYC Requirements
KYC requirements generally take the form of the submission of a government photo ID and some type of other unique identifiers, such as a Social Security Number in the United States. To many crypto natives, this level of personal intrusion is the antithesis of blockchain technology. However, there is no way around this requirement. A CEX is a traditional business entity, if it wishes to operate in a country it must fall under the regulatory requirements of that country.
Custodial Wallets
There is a common phrase in the crypto community, “Not your Keys, Not your Coins”. This term refers to CEXs and their use of custodial wallets. When a user purchases funds on a CEX, while it is tied to your exchange account, you do not have control of the private key of your CEX wallet. Think of the private key to a wallet being the key to a safe. With a CEX, they own that key. You never have true ownership of your funds. Your funds are at the mercy of their security, and if it’s lost, your only hope is the corporation is benevolent and refunds you.
Strict Listing Requirements
CEXs decide what trades on their platforms, and they only want what makes them the most money. So very commonly you see coins that have no real utility value (DOGE Coin) being listed for trade on these websites. The quality of investment is in question with “meme coins” like this, but they make the CEX money from the trading fees due to the popularity, so the coin gets a listing. To a CEX, volume is what matters. So they offer exposure to popular tokens, but popularity doesn’t guarantee a sound product.
High Trading and Withdrawal Fees
Trading on a CEX generally comes with high fees. They are a traditional business with a traditional administrative structure and have to answer to regulatory bodies. This leads to increased overhead for the company. This overhead can lead to higher trading and withdrawal fees for the user.
While CEXs are the first user experience people have in the crypto space, their traditional structure leads to higher costs and less exposure to the ecosystem as a whole. Add to this, never truly owning your assets means they are not recommended to operate off of if you decide to become a more seasoned investor.
Now that we highlighted some disadvantages of the CEX space, continue on to our article on Decentralized Exchange (DEX).