Centralised Exchanges, also known as CEX are a type of cryptocurrency exchange platform. It is owned by a centralised organisation, hence the name centralised exchange. The centralised organisation acts as an intermediary. It matches the buyers and sellers.
Here at Koda we want to educate our audience and crypto users. We do this by sharing information that helps users gain a better understanding of the world of crypto. For example, in this blog post we look at centralised exchanges.
Below you can see we look at the features and benefits, as well as the limitations of a centralised exchange. This allows you, as a crypto user, to make an informed decision about the right crypto exchange for your crypto investment.
The Benefits Of A Centralised Exchange.
There are many centralised exchanges out there. In this blog post we share the features and benefits that define centralised exchanges from decentralised exchanges.
• They Are Custodial
The fact that CEXs are custodial is one of the key defining features. Due to the fact that centralised exchanges are custodial means that when you want to trade on the exchange you keep your funds in your crypto wallet. This wallet is tied to the exchange itself. It is not tied to you and your own wallet. This means that the exchange will keep the private keys to your wallet. Instead of you holding the private keys to your wallet, you will just have the login details for the platform so you can gain access to your wallet.
If you are a new crypto user, this can have some benefits for you. It will help you get the hang of the complexities of crypto for example. A CEX means that you can use the exchange to handle the burdens of safely managing the private keys. This is one if the biggest worries for many people that are new to the world of crypto. When newbies use centralised exchanges, they can focus on crypto trading instead. This is why centralised exchanges are so tempting and attractive for crypto beginners.
• They Offer Liquidity
Another feature of centralised exchanges is that they are highly liquid. The CEXs facilitate trades by matching the buy and sell orders from users centrally. It’s also commonly known as the ‘order book’ system. This means that liquidity is a function of the number of buy and sell orders on the books. With many new crypto users taking their first steps in the world of crypto via a centralised exchange it often means that the order values are higher than on a decentralised exchange.
The centralised exchange is further supported by the fact that the exchange platform can offer incentives to large-volume traders. This is because these large volume traders provide liquidity to the order books of the centralised exchange. Some centralised exchanges have recorded over $30 billion daily from transactions. Due to the fact that these crypto trading figures are so high, it is likely that you will always find liquidity for the trade you need.
• Ease Of Use
As we have already stated, centralised exchanges are ideal for people that are new to the world of cryptocurrencies. Therefore, it is not surprising that centralised exchanges are often associated with ‘ease of use’. A central exchange is very often the place that most crypto users will buy their very first cryptocurrencies using their credit card. This process is commonly known as ‘on-ramping’ into crypto.
Based on centralised exchanges being the very first thing people see when they buy their first crypto, it means that they need to offer ease of use. CEXs have a reputation of being clear and clean with an interface that is user-friendly.
• Know Your Customer
There has been a real shift in the global market. It’s clear that crypto coins are here to stay, and exchanges are making efforts to support this. For example, many centralised exchanges are making attempts to ensure that crypto coins and crypto tokens can not be used to launder money.
Before you begin trading on a centralised exchange you will find that you need to products documents. These documents will need to confirm your ID. In some cases, you will need to provide documents that confirm your address. This is done to coordinate with their measures to ensure cryptocurrencies can’t be used for money laundering.
The Limitations Of A Centralised Exchange.
So, we have looked at the benefits and features of a centralised exchange. Now we look at the limitations. As a crypto investor it is important that you weigh up the pros and cons of all your crypto investment decisions. This is why we have shared the limitations of a centralised exchange to enable you to make an informed decision.
There are some limitations of centralised exchanges and a few of these are what spurred on the innovation and creation of their decentralised exchange counterpart.
• Ownership And Security
As we have already touched on, a centralised exchange requires that you keep your crypto funds in the wallet of the exchange. These private keys are then managed by the exchange platform. While this takes away the stress or worry of managing your private keys, there is a downside to it.
If they are not your private keys, then they are not your crypto coins. By letting the crypto exchange manage your wallet means that the crypto assets inside your wallet are not truly yours, whatever they are. While this raises the question of ownership, it raises another concern too. By the exchange managing your private keys there are security implications too. By leaving your crypto funds within the infrastructure of the exchange and now your own wallet, you are relying on and trusting the security standards of another entity. If the exchange was to become hacked or phished, your crypto coins and investment would be gone. This is the same if the centralised exchange platform was to go out of business.
• Barriers To Entry
One of the biggest disadvantages to a centralised exchange is the barriers to entry. These have been set by the exchange platform itself. These limitations can be seen in various ways. For example, you may be looking to trade a particular coin however due to reasons of the exchange, they have chosen not to integrate that crypto coin into their centralised exchange. You may also live in a country where certain services available on the centralised exchange are not available to you due to your location.
The decision making of the barriers to entry are at the discretion of the exchange platform. These means that users of the centralised exchange platform are limited to the access that is granted to them by the centralised exchange platform.
• Few Options
Due to the fact that the centralised exchange platform has the decision-making power over the crypto coin and tokens available, it means that the crypto options may not reflect the crypto options that users want to see and interact with. It is also rare that users will be given early bird advantages on new projects where they may have been on a decentralised exchange.
• Sanction Vulnerability
A centralised exchange exists as a distinct legal entity. This means that a centralised exchange platform is not susceptible to sanctions and limitations from states. For example, we have seen this in cases across China and Iran where not all states are fans of cryptocurrencies.
It’s important to remember the ownership of the coins, and the fact they belong to the exchange and not you. This means that is a centralised exchange was shut down or limited by external authorities, all of your crypto coins, tokens and investments in that centralised exchange platform would be gone.
Still not sure if a centralised exchange is the best option for your crypto investment or not? Fell free to call our UK based team. We will happily talk you through the options and which one could be best for you.
Here at Koda, we are here to help you make the most of your crypto investment.