A Centralised Exchange is an organization that handles large-scale cryptocurrency trading by using the normal business models of traditional trading organizations such as the Stock Exchange, etc. Cryptocurrency trading involves the exchange of various crypto coins or tokens for the transactions being carried out, the function of the centralized exchanges is that they completely eradicate the complexities involved in trading these coins or tokens by creating a platform where users can straightforwardly interact with the market by going through them. Centralized exchanges use a system whereby all transactions being carried out on their platforms are all logged in a system that automatically checks to find the corresponding buy or sell order. Centralized exchanges often aggregate their users’ buy and sell orders before executing the orders. CEX users do not exchange crypto or fiat currencies with each other. Instead, when they deposit their funds onto an exchange, the latter takes over the custody of those assets and issues a corresponding amount of IOUs to the trader. The exchange tracks every user’s IOUs internally as they change hands in trades and only convert them into actual currency at the moment of withdrawal of funds. Some examples of Centralised exchanges include Kraken, Binance, Coinbase, etc. Centralized Exchanges create a method where buyers and sellers can carry out trade transactions with the average price being determined by the last price a particular crypto asset was sold or bought for. The average price is simply the transaction price that is gotten from the order books aggregate that are usually gotten from the CEX’s use of special software that aggregates the price at market sessions. Centralized Exchanges also serve as a medium where individuals can turn their fiat currencies into crypto by trading via their platforms. Centralized exchanges carry out millions of crypto transactions daily. They have the resources to carry out various sizes of transactions and have a large pool of users both buyers and sellers that enable them to carry out these transactions because they incorporate the ‘Marketplace’ system. Centralized exchanges are an integral part of the cryptocurrency space because they help in onboarding users into crypto through their various user interaction schemes. Crypto is usually stored on ‘hot’ wallets when trading with centralized exchanges. The exchanges have this wallet because it’s the storage wallet of tradable crypto currently on the platform by users. There is also a ‘Cold’ wallet that serves as a low-traded cryptocurrency wallet. Centralized exchanges are often discussed because they have various features that enable them to function to a various degree. These features include KYC, and Wallet Security/Ownership.

KYC (Know Your Customer) A feature of Centralised Exchanges includes the requirements needed by the Exchange to function properly. KYC requirements are often asked by these exchanges for the proper identification of their users. Although this feature makes decentralization seem to lose its true meaning, to an extent it’s necessary for functionality. The KYC requirements are often a necessity because it’s a way users would be identified properly in transactions regarding financial institutions e.g Banks for proper authentication or authorization. Although some centralized exchanges prefer to perform without the KYC requirements, most exchanges require their users to drop a certain form of identification before they can transact.

Wallet Security/Ownership The wallets of centralized exchanges are all owned by the exchanges only. This can be an advantage and also a disadvantage. The advantage is that you are not the sole holder of your keys hence you will not lose them because the exchange will always keep them for you. The disadvantage is that there would often be the risk of security breaches because these wallets are always under constant attacks.

Advantages of Centralized Cryptocurrency Exchanges

• Protects against scandals: The entire world of cryptocurrency is online. Transactions often involve the use of complicated jargon which makes novice investors uncomfortable. Also, the absence of any centralized agency to provide legitimacy makes the transactions risky and even murky to some extent. Cryptocurrency investors have faced their fair share of scandals. Conservative investors want to ensure that they deal with a reputable intermediary to protect themselves against such scandals. This is where centralized exchanges are viewed in a favorable light. Since these corporations have a physical presence and are regulated by the government, investors feel that they can avoid scandals by using the services of these exchanges.

• Can be Accessed by Institutional Clients: Several institutional investors want to invest in cryptocurrency for the sake of diversification. However, they are unable to do so since their bylaws require them to only deal with reputable parties. For such entities, centralized exchanges are very important since they provide the only mechanism to invest in the cryptocurrency markets.

• Service: Centralized exchanges provide a very important service to cryptocurrency investors. These exchanges have call centers where customer service personnel are trained to explain the nuances of cryptocurrencies to traders in an intuitive and easy-to-understand manner. Also, centralized exchanges provide custodian services. This means that they have a specialized infrastructure to store digital currency. These exchanges provide digital vaults which are highly secure. Some of these exchanges even provide services wherein the digital coins are stored offline in a special form of hardware. These services are very valuable for investors who are concerned with the security of their investment.

• Insurance: Cryptocurrency exchanges know that no matter how high-tech their security is, they will still be prone to digital attacks. For this reason, the funds at a cryptocurrency exchange are insured. Of course, an additional fee is charged to provide such insurance. However, it offers peace of mind to investors who may be constantly worried about the possibility of digital attacks.

• Investing Tools: Lastly, centralized cryptocurrency exchanges also provide value-added services. These services include charting tools that help the investors by providing information in an organized manner and aid in decision making.

Disadvantages of Centralized Cryptocurrency Exchanges There are several disadvantages to using centralized exchanges as well. Some of them have been written below: *

• Fewer Options: Investors on centralized exchanges end up trading a variety for safety. In most centralized exchanges, only 40 to 50 types of cryptocurrencies are available for trading. This is a small fraction of the total number of cryptocurrencies in the crypto universe. Since these exchanges are very concerned about their reputation, they only allow reputed cryptocurrencies to list. However, this also reduces the number of trading options. Reduced options also have a financial impact since most of the growth in the past few years has come from newer cryptocurrencies.

• Strict Regulations: Centralized exchanges are licensed by the government. As a result, they have to follow strict government norms. The know your customer (KYC) norms at some of these exchanges are equivalent to those of big banks. Centralized exchanges deal with a wide variety of regional and federal government agencies. The data at these exchanges may also be accessed by these agencies. These strict regulations are a deal-breaker for many investors who prefer privacy.

• Risk of Bankruptcy: The centralized exchanges are also private corporations. Hence the money which is in their custody is in effect a loan that an investor has given to them. Wherever there is a loan, there is always a chance of default. Up until now, there has not been any news of the bankruptcy of any exchange. However, there is always a possibility that this might happen in the future. Investors who use these centralized cryptocurrency exchanges run the risk of losing money as a result of such bankruptcies.

  The reality is that centralized cryptocurrency exchanges provide some legitimacy to the trading of these digital currencies. In the absence of these exchanges, entering and exiting cryptocurrency markets can be fraught with risk and uncertainty.

A Centralised Exchange is an organization that handles large-scale cryptocurrency trading by using the normal business models of traditional trading organizations such as the Stock Exchange, etc. Cryptocurrency trading involves the exchange of various crypto coins or tokens for the transactions being carried out, the function of the centralized exchanges is that they completely eradicate the complexities involved in trading these coins or tokens by creating a platform where users can straightforwardly interact with the market by going through them. Centralized exchanges use a system whereby all transactions being carried out on their platforms are all logged in a system that automatically checks to find the corresponding buy or sell order. Centralized exchanges often aggregate their users’ buy and sell orders before executing the orders. CEX users do not exchange crypto or fiat currencies with each other. Instead, when they deposit their funds onto an exchange, the latter takes over the custody of those assets and issues a corresponding amount of IOUs to the trader. The exchange tracks every user’s IOUs internally as they change hands in trades and only convert them into actual currency at the moment of withdrawal of funds. Some examples of Centralised exchanges include Kraken, Binance, Coinbase, etc. Centralized Exchanges create a method where buyers and sellers can carry out trade transactions with the average price being determined by the last price a particular crypto asset was sold or bought for. The average price is simply the transaction price that is gotten from the order books aggregate that are usually gotten from the CEX’s use of special software that aggregates the price at market sessions. Centralized Exchanges also serve as a medium where individuals can turn their fiat currencies into crypto by trading via their platforms. Centralized exchanges carry out millions of crypto transactions daily. They have the resources to carry out various sizes of transactions and have a large pool of users both buyers and sellers that enable them to carry out these transactions because they incorporate the ‘Marketplace’ system. Centralized exchanges are an integral part of the cryptocurrency space because they help in onboarding users into crypto through their various user interaction schemes. Crypto is usually stored on ‘hot’ wallets when trading with centralized exchanges. The exchanges have this wallet because it’s the storage wallet of tradable crypto currently on the platform by users. There is also a ‘Cold’ wallet that serves as a low-traded cryptocurrency wallet. Centralized exchanges are often discussed because they have various features that enable them to function to a various degree. These features include KYC, and Wallet Security/Ownership.

KYC (Know Your Customer) A feature of Centralised Exchanges includes the requirements needed by the Exchange to function properly. KYC requirements are often asked by these exchanges for the proper identification of their users. Although this feature makes decentralization seem to lose its true meaning, to an extent it’s necessary for functionality. The KYC requirements are often a necessity because it’s a way users would be identified properly in transactions regarding financial institutions e.g Banks for proper authentication or authorization. Although some centralized exchanges prefer to perform without the KYC requirements, most exchanges require their users to drop a certain form of identification before they can transact.

Wallet Security/Ownership The wallets of centralized exchanges are all owned by the exchanges only. This can be an advantage and also a disadvantage. The advantage is that you are not the sole holder of your keys hence you will not lose them because the exchange will always keep them for you. The disadvantage is that there would often be the risk of security breaches because these wallets are always under constant attacks.

Advantages of Centralized Cryptocurrency Exchanges

• Protects against scandals: The entire world of cryptocurrency is online. Transactions often involve the use of complicated jargon which makes novice investors uncomfortable. Also, the absence of any centralized agency to provide legitimacy makes the transactions risky and even murky to some extent. Cryptocurrency investors have faced their fair share of scandals. Conservative investors want to ensure that they deal with a reputable intermediary to protect themselves against such scandals. This is where centralized exchanges are viewed in a favorable light. Since these corporations have a physical presence and are regulated by the government, investors feel that they can avoid scandals by using the services of these exchanges.

• Can be Accessed by Institutional Clients: Several institutional investors want to invest in cryptocurrency for the sake of diversification. However, they are unable to do so since their bylaws require them to only deal with reputable parties. For such entities, centralized exchanges are very important since they provide the only mechanism to invest in the cryptocurrency markets.

• Service: Centralized exchanges provide a very important service to cryptocurrency investors. These exchanges have call centers where customer service personnel are trained to explain the nuances of cryptocurrencies to traders in an intuitive and easy-to-understand manner. Also, centralized exchanges provide custodian services. This means that they have a specialized infrastructure to store digital currency. These exchanges provide digital vaults which are highly secure. Some of these exchanges even provide services wherein the digital coins are stored offline in a special form of hardware. These services are very valuable for investors who are concerned with the security of their investment.

• Insurance: Cryptocurrency exchanges know that no matter how high-tech their security is, they will still be prone to digital attacks. For this reason, the funds at a cryptocurrency exchange are insured. Of course, an additional fee is charged to provide such insurance. However, it offers peace of mind to investors who may be constantly worried about the possibility of digital attacks.

• Investing Tools: Lastly, centralized cryptocurrency exchanges also provide value-added services. These services include charting tools that help the investors by providing information in an organized manner and aid in decision making.

Disadvantages of Centralized Cryptocurrency Exchanges There are several disadvantages to using centralized exchanges as well. Some of them have been written below: *

• Fewer Options: Investors on centralized exchanges end up trading a variety for safety. In most centralized exchanges, only 40 to 50 types of cryptocurrencies are available for trading. This is a small fraction of the total number of cryptocurrencies in the crypto universe. Since these exchanges are very concerned about their reputation, they only allow reputed cryptocurrencies to list. However, this also reduces the number of trading options. Reduced options also have a financial impact since most of the growth in the past few years has come from newer cryptocurrencies.

• Strict Regulations: Centralized exchanges are licensed by the government. As a result, they have to follow strict government norms. The know your customer (KYC) norms at some of these exchanges are equivalent to those of big banks. Centralized exchanges deal with a wide variety of regional and federal government agencies. The data at these exchanges may also be accessed by these agencies. These strict regulations are a deal-breaker for many investors who prefer privacy.

• Risk of Bankruptcy: The centralized exchanges are also private corporations. Hence the money which is in their custody is in effect a loan that an investor has given to them. Wherever there is a loan, there is always a chance of default. Up until now, there has not been any news of the bankruptcy of any exchange. However, there is always a possibility that this might happen in the future. Investors who use these centralized cryptocurrency exchanges run the risk of losing money as a result of such bankruptcies.

  The reality is that centralized cryptocurrency exchanges provide some legitimacy to the trading of these digital currencies. In the absence of these exchanges, entering and exiting cryptocurrency markets can be fraught with risk and uncertainty.