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CENTRALIZED EXCHANGES: ADVANTAGES AND DISADVANTAGES OF USING THEM

Centralized exchanges (CEXs) are platforms where users buy and sell cryptocurrencies by exchanging them for fiat or other cryptocurrency trading pairs like USDT, ETH or BTC. These kind of exchanges are highly regulated and are known for enforcing KYC processes after sign up so as to collect user’s personal details. Unlike in decentralized exchanges, centralized exchanges facilitate trades by maintaining an order book which is a collection of buy and sell transactions posted by individual traders. Let’s take a look at centralized exchanges and the possible advantages and disadvantages associated with it.

WHAT ARE CENTRALIZED EXCHANGES (CEXs)?

Centralized exchanges are marketplaces that allow traders to buy and sell cryptocurrencies by fully regulating transactions mostly through an order book. Unlike Decentralized exchanges, centralized exchanges enforce a sign up process and KYC verification before users can transact. Projects listed on centralized exchanges are well vetted to prevent cases of scam and rug pulls associated with decentralized exchanges.

CHECK OUT: WHAT ARE DECENTRALIZED EXCHANGES?

Centralized exchanges have become popular recently due to the regulations associated with them. In actual sense, they have helped to curb cases of crypto related frauds due to the proper vetting of projects. They have also helped to do away with the difficulties associated with trading in decentralized exchanges which include slippage tolerance, manual wallet configuration and the likes of them.

Although CEXs have helped reduce cases of crypto related scams, they also have some disadvantages which will be discussed later in this article. Some notable examples of centralized exchanges are; Binance, Huobi global, Coinbase, Kucoin and Kraken.

ADVANTAGES OF CENTRALIZED EXCHANGES

The major advantage of trading on a CEX is the safety and insurance associated with it. CEXs make sure to vet projects properly before listing so as to prevent cases of fraud. Some of the major advantages associated with trading on a CEX are;

Reduced cases of crypto related frauds

Centralized exchanges (CEXs) have helped to tackle cases of fraud and rug pulls in the crypto space by properly vetting projects before listing. With this, traders can be certain that projects listing on their preferred CEX are scam and rug free projects. Unlike in decentralized exchanges, certain conditions must be met before a project can be listed on a CEX. Some of these conditions may include smart contract safety, team doxxing and strength of community. These conditions are checked primarily to help protect the interest of the investors.

Simplicity and ease of use

CEXs are generally easier to use than DEXs. Unlike in DEXs where slippage is adjusted manually, in CEXs it is done automatically thereby making it more beginner friendly. Also, cases of funding wallets initially with the networks native token do not arise so there are hardly cases of assets being stuck in a particular wallet.

In centralized exchanges, all accepted networks are already configured which eliminates issues of having to configure wallets manually for a particular network. This has also helped to accommodate newbies who are new to the blockchain space and do not know how to go about configuring wallets.

Insurance

Since traders assets are typically stored in the exchange’s wallet, most big centralized exchanges offer insurance in cases of hack or loss of assets. This insurance does not apply when assets are lost due to traders carelessness. This is a major boost as traders feel protected knowing that their assets are in safe hands.

Large trading volume

CEXs usually have a higher trading volume than DEXs probably due to the huge community following or due to the ease of use. In CEXs, cases of liquidity running low hardly occur and if they do, the CEX immediately delists the project in questions if they are unable to add more liquidity.

CHECK OUT: GET STARTED WITH CRYPTOCURRENCIES

DISADVANTAGES OF CENTRALIZED EXCHANGES

CEXs have become really popular in recent times as we’ve seen with Binance and Kucoin. In as much as they’ve helped to reduce issues of crypto related frauds, they also have some disadvantages which will be briefly discussed below.

Expensive for small projects

Since centralized exchanges are not open like decentralized exchanges, projects need to pay a particular fee before being listed on a CEX. These fees may range from around 20,000 USDT for smaller exchanges to as high as 500,000 USDT for bigger exchanges. These fees are on the high side and only big projects can afford them. This is a major downside as many good project with low budgets seem to settle for DEXs due to lack of funds.

Lack of privacy

In the crypto space, many people prefer to remain anonymous probably due to the fact that crypto has not been widely adopted. Centralized exchanges are tampering with this in the sense that all users must go through a KYC verification before trading on CEXs. In as much as this is good to help reduce fraud rate, it also does not favour some investors due to country regulations.

Risk of hack

Since centralized exchanges hold huge sums of assets, they have become a target for hackers who try to look for loopholes in order to get away with money. Cases of hacks have been reported even with exchanges as big as Binance and Kucoin. Mostly, big exchanges store huge sums of assets in cold wallets to prevent cases of hack. In decentralized exchanges, risk of hack is low because investors are in full control of the assets in their wallets and hackers mostly target wallets with very huge amounts of assets.

CONCLUSION

Centralized exchanges (CEXs) have been a major breaking point in the crypto space and have helped to tackle lots of issues ranging from crypto related scams and ease of transactions especially for newbies. They have their own downside which may include the high cost of listing a project but in simple words, a project that does not have enough money cannot run effectively. The high cost of listing being a drawback may also be to the advantage of the investors. In as much as centralized exchanges vet projects before listing them, every investor is advised to do a proper research before investing in any project.

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