#explain-card ## Introduction A **[[Centralized exchange|Centralized Exchange]] (CEX)** is a type of cryptocurrency exchange that is operated and controlled by a single company or entity. Users deposit their funds (both fiat and crypto) into accounts managed by the CEX, and trades are executed on the exchange's internal order books rather than directly on a blockchain. CEXs act as trusted intermediaries, similar to traditional stock exchanges. - **Importance/Purpose:** CEXs are often the primary gateway for individuals to enter the cryptocurrency market, offering user-friendly interfaces, a wide range of trading pairs, [[Liquidity|liquidity]], and various financial services like [[Staking|staking]] and lending. They play a crucial role in price discovery and market liquidity for cryptocurrencies. - **Target Audience:** Retail crypto traders and investors, institutional investors, individuals looking for an easy way to buy/sell cryptocurrencies with fiat currency. ## Core Concepts & Mechanism ### Key Characteristics 1. **Custodial Nature:** Users entrust their [[Private key|private keys]] and funds to the CEX. The exchange holds [[Custody|custody]] of the assets in its own [[Wallet|wallets]]. 2. **Order Books:** Trades are matched using an order book system, where buy and sell orders are listed at different price levels. 3. **Off-Chain Transactions:** Most trades on a CEX occur off-chain on the exchange's internal [[Ledger|ledger]]. Only deposits and withdrawals are recorded on the actual blockchain. 4. **[[Regulation]] & Compliance:** Reputable CEXs are typically subject to regulatory oversight in the jurisdictions where they operate, often requiring users to complete KYC ([[Know your customer|Know Your Customer]]) and [[Anti money laundering]] procedures. 5. **Central Authority:** A single entity controls the exchange's operations, including listing new assets, setting fees, and managing security. ### How CEXs Work 1. **Account Creation & KYC:** Users create an account and usually complete KYC verification. 2. **Deposits:** Users deposit fiat currency (e.g., USD, EUR) or cryptocurrencies into their CEX account. 3. **Trading:** Users place buy or sell orders for various cryptocurrency pairs. The CEX's matching engine executes trades when buy and sell orders align. 4. **Withdrawals:** Users can withdraw fiat currency to their bank accounts or cryptocurrencies to their external wallets. 5. **Fees:** CEXs typically charge fees for trading, deposits, and withdrawals. ## Use Cases & Implications ### Benefits of CEXs - **User-Friendliness:** Generally offer intuitive interfaces, making them accessible to beginners. - **Liquidity:** Often have high [[Trading volume|trading volumes]], leading to better price discovery and tighter spreads. - **Speed:** Off-chain order matching allows for fast trade execution. - **Fiat On/Off Ramps:** Provide easy ways to convert fiat currency to crypto and vice versa. - **Variety of Services:** Many CEXs offer additional services like staking, lending, futures trading, and IEOs (Initial Exchange Offerings). - **Customer Support:** Usually provide customer support channels. ### Limitations & Challenges of CEXs - **Custodial Risk (Counterparty Risk):** Users do not control their private keys. If the CEX is hacked, becomes insolvent, or engages in fraudulent activities, users can lose their funds (captured by the phrase "Not your keys, not your coins"). Examples include the Mt. Gox hack or the FTX collapse. - **Centralization:** A single point of failure and control. CEXs can be subject to government pressure, censorship, or arbitrary decisions by the exchange operators (e.g., delisting assets, freezing accounts). - **Security Risks:** Large CEXs holding significant amounts of cryptocurrency are attractive targets for hackers. - **Regulatory Uncertainty:** The regulatory landscape for CEXs is still evolving in many jurisdictions, leading to potential compliance issues or service disruptions. - **Lack of Transparency (Potentially):** Internal operations and proof of reserves may not always be fully transparent. ### CEX vs. Decentralized Exchange (DEX) - CEXs are custodial and rely on a central operator, while [[DEX|DEXs]] are non-custodial and allow peer-to-peer trading directly from users' wallets via [[Smart contract|Smart contracts]]. - CEXs often offer more features and higher liquidity for a wider range of assets, whereas DEXs prioritize user control and censorship resistance. ## Related Concepts - Wallet - Know your customer - Anti money laundering - Liquidity - Private key - Regulation - Examples: [[Coinbase]], [[Binance]]