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Advantages & Disadvantages of Centralized Exchanges 

July 4, 2023

Cryptocurrency exchanges can be divided into centralized exchanges (CEXes) and decentralized exchanges (DEXes). Both types allow users to buy and trade crypto assets. However, there are some fundamental differences between the two.

A CEX is a type of exchange managed by a central entity, usually a company. This company has control over the exchange's operation as well as users' personal information and funds. Due to its centralized nature, CEXes tend to offer a more user-friendly experience and more extra services than their decentralized counterparts. However, they also have some disadvantages. Let's look closer at the advantages and disadvantages of CEXes. 

Advantages of CEXes

Firstly, CEXes are user-friendly. They typically use an order-book model, similar to traditional stock exchanges, where all buy and sell orders are placed. The order book matches buyers with sellers, allowing a seamless exchange experience, given enough liquidity. Since CEXes are similar to traditional exchanges in their work model, users can quickly grasp how to use their platforms or apps and access all services and products. Moreover, such exchanges have much more power over their operations than decentralized ones. Therefore, they can make their products and services as intuitive and convenient as possible, for instance, by eliminating some steps that decentralized exchanges must include.

Secondly, CEXs often offer additional services, including secure wallets to store coins, regular product updates, and customer support. These services can help even the least experienced users feel confident trading their crypto assets.

Thirdly, CEXes usually have a careful selection process for all supported assets, conducting extensive research on new tokens before listing to prevent rug pulls. A rug pull is a fraudulent crypto scam where a team promotes their project's token, increases its value, and then disappears with the funds, leaving their investors with a worthless asset. CEXes ensure users' security and maintain a good reputation by thoroughly checking all projects beforehand.

Another advantage of CEXes is their liquidity. Due to their broader client base and constant flow of buy and sell orders, CEXes usually offer the best liquidity on the market compared to decentralized exchanges. Consequently, their users can expect to swap various crypto assets with faster exchange times and more advantageous rates. Although the situation is gradually changing with the emergence of DEXes that provide sufficient liquidity, CEXes still often have higher liquidity and a greater variety of supported assets.

The last notable advantage is fiat support. This feature is almost exclusive to CEXes since it requires authentication procedures not typically welcomed on decentralized exchanges. CEXes follow regulations, which gives them an advantage in connecting with the traditional financial system and working with banking services. Thus, they can provide fiat services to users, allowing them to transfer funds from their bank accounts directly to the exchange for buying crypto. Conversely, some CEXes also offer the option to exchange crypto assets back to fiat and withdraw if needed. 

Disadvantages of CEXes

Centralized exchanges have some significant downsides, too. If you value privacy and want to keep your personal information private, then DEXes are better options than CEXes. The latter must comply with all applicable regulations and work with various governing entities to provide financial services like fiat. Therefore, users are often required to go through KYC or AML checks to validate their identity, which may involve showing a passport or other documents and taking a selfie. While these procedures may be necessary to prevent criminal activity on exchange platforms, they are unacceptable for users who value anonymity. 

Control is a big issue that expands beyond privacy concerns. Centralized exchanges store your funds on their servers or wallets, which means they can move or use them without your knowledge or consent. Such a possibility is slight but still probable. Even without management fraud, CEXes can exercise control over your funds. For instance, an exchange may need to approve your withdrawal from its platform, which can take up to several days. Moreover, they can freeze your crypto assets for various reasons, causing distress to users who need their funds back.

The security of funds is another primary concern with CEXes. While they generally have robust security measures in place, hackers have been able to compromise users' funds in some instances. As centralized exchanges store some or all liquidity in one place, hackers have a higher chance of stealing assets. These drawbacks might only affect some, but those prioritizing privacy, security, and decentralization should know the potential risks.

Offered Services

Cryptocurrency exchanges, or CEXes, offer various ways to buy and sell cryptocurrencies. One option is a market order, which allows you to buy or sell cryptocurrencies at the current market price instantly. Another option is a limit order, where you can set a specific price for buying or selling an asset, and the order executes when the asset reaches that price. Some exchanges also offer professional trading platforms with additional features, like margin trading.

CEXes also provide digital wallets for storing cryptocurrencies. By using the exchange's wallet, you trust them to safeguard your funds and private keys. Consequently, it is essential to research the security measures said exchange implements in advance. You can read this article on hot and cold wallets to learn more about different types of crypto wallets.

In addition, some centralized exchanges offer specialized custodial services for financial institutions and investment firms that invest in cryptocurrency but prefer to avoid managing their private keys. These assets are usually kept in cold storage instead of the exchange's wallets to provide increased security.

Final Thoughts

Centralized exchanges might be more popular among the general public due to their ease of use, efficiency, and high trading volumes. However, this does not mean that such exchanges do not have disadvantages that could be critical for some users. As more decentralized exchanges prove their efficiency and convenience, the trend of favoring centralized exchanges will likely change. Meanwhile, customers should choose the exchange that best fits their needs and objectives. 

Kinetex Network aggregates liquidity from hundreds of sources, including DEXes and liquidity aggregators. By using the Aggregation mode of the Kinetex dApp and taking advantage of Kinetex algorithms, users can swap over 5000 coins and tokens with maximum benefit. Moreover, the team is working on the second mode, Flash Trade. This mode will allow resolvers to use DeFi (decentralized finance) and CeFi (centralized finance) liquidity, thus linking those two industries.

Kinetex Network: Website | Kinetex dApp