Centralized Exchange (CEX): A centralized exchange (CEX) is a type of digital marketplace that enables individuals to buy and sell various financial assets, including cryptocurrencies. In contrast to decentralized exchanges that operate on a peer-to-peer basis without intermediaries, centralized exchanges are managed and operated by a central entity or company, which acts as an intermediary facilitating transactions between buyers and sellers.
Users of centralized exchanges typically deposit their funds into their exchange accounts and utilize these funds to place buy and sell orders for a wide range of financial assets, including cryptocurrencies. The centralized exchange employs specialized software to analyze and match these buy and sell orders, executing transactions efficiently and accurately.
It’s important to note that in centralized exchanges, users do not directly trade cryptocurrencies or fiat currencies with each other. Instead, when users deposit their assets onto the exchange, the exchange assumes custody of these assets and issues corresponding IOUs (I Owe You) to the traders. These IOUs are tracked internally within the exchange’s system and are only converted into actual currency or cryptocurrency when users choose to withdraw their funds.
Centralized exchanges are widely adopted due to their speed and cost-efficiency in processing transactions, making them a preferred choice for day traders and crypto investors. However, they come with certain drawbacks, including a lack of transparency regarding internal operations, which can potentially lead to malicious practices such as price manipulation and wash trading. Additionally, centralized exchanges are susceptible to security breaches, technical issues, and government regulations, which can impact their downtime and users’ funds.