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Centralized Exchanges

A centralized exchange (CEX) is a cryptocurrency trading platform that is operated by a centralized authority or company. In a centralized exchange, users create accounts on the platform, deposit their funds into wallets controlled by the exchange, and then execute trades through the exchange's order book.
Here are key characteristics of centralized exchanges:
  1. 1.
    Centralized Control:
    • A central entity, typically a company, operates and controls all aspects of the exchange. This includes managing user accounts, order books, matching buy and sell orders, and handling deposits and withdrawals.
  2. 2.
    User Identification:
    • Centralized exchanges often require users to undergo identity verification processes, known as Know Your Customer (KYC), which involve providing personal information and documents. This helps the exchange comply with regulatory requirements and prevent illicit activities.
  3. 3.
    Fund Custodianship:
    • Users need to deposit their funds into wallets controlled by the exchange before they can trade. The exchange acts as the custodian of these funds during the trading process.
  4. 4.
    High Liquidity:
    • Centralized exchanges generally have higher liquidity compared to decentralized exchanges. Liquidity is the ability to quickly buy or sell assets without causing a significant price change.
  5. 5.
    Speed and Efficiency:
    • Centralized exchanges are known for their high speed and efficiency in executing trades. The centralized nature allows for quick order matching, trade execution, and rapid updates to the order book.
  6. 6.
    Market Surveillance:
    • Centralized exchanges can implement market surveillance tools to monitor trading activities, detect suspicious behavior, and ensure compliance with regulations.
  7. 7.
    Examples of Centralized Exchanges:
    • Coinstore, Binance, Coinbase, Kraken, and Bitstamp are examples of centralized exchanges.
While centralized exchanges offer high liquidity and efficient trading, users need to trust the exchange with their funds. The centralized nature of these platforms also makes them vulnerable to hacking attempts, as hackers may target the central point of control to access user funds. As a result, users are advised to use secure practices, such as enabling two-factor authentication and withdrawing funds to private wallets when not actively trading.