Centralized exchanges facilitate the buying, selling, and trading of different cryptocurrencies by enabling custodial services. The platform is controlled and monitored by a central authority, allowing a secure and trusted marketplace where participants can exchange crypto assets with fiat currencies or other cryptos.
Understanding the Centralized Exchange
Centralized exchanges are platforms that enable users to buy, sell, and swap cryptocurrencies. Owned and controlled by a central authority, centralized exchanges are subject to the rules and regulations of the jurisdiction it operates in. These platforms hold the custody of the assets, ensuring the ease of trade and the need to trust the platform. It prioritizes user experience, providing an enhanced user interface for both beginners and experienced traders.
Key Features of Centralized Exchanges
Centralized exchange platforms facilitate crypto trades. The key features of the platform include,
1. Centralization
Unlike decentralized platforms that give investors sole control over their assets by eliminating the involvement of third parties, centralized exchanges are controlled and monitored by a central authority that is responsible for the functioning of the platform. It operates in compliance with the rules and regulations of the government to ensure safe trading.
2. Robust security
Centralized exchanges utilize robust security features to protect users from money laundering and other cyber attacks. The platform uses two-factor authentication, security audits, cold storage, and withdrawal restrictions. The necessity for completing KYC (Know Your Customer) documents to avail of the services of the platform prevents the access of fake or fraudulent users.
3. High liquidity
In crypto, liquidity is the ease of conversion of digital assets to digital tokens or fiat currencies without affecting the price. Compared to decentralized exchanges, centralized exchanges offer high liquidity. A highly liquid platform enables faster and more stable transactions, avoiding risks of price movements.
4. User friendly interface
Elevated user experience is one of the major advantages of centralized exchanges, offering intuitive dashboards, easy navigation tools, and quick trade. The platform enables traders to buy and sell their assets seamlessly, irrespective of beginner or experienced traders.
5. Multiple crypto support
Centralized exchanges support a large number of cryptocurrencies, providing traders with a wider collection to choose from. Major centralized exchange platforms list newly launched tokens, giving investors access to promising projects.
How Centralized Exchanges Work?
Centralized exchanges facilitate the buying, selling, and trading of cryptocurrencies. It utilizes an order book to enable seamless crypto trading, which includes a list of the buy and sell orders, their price and quantity, etc. This helps traders to evaluate the existing market depth and liquidity.
Traders place a buy or sell order on a centralized exchange, the exchange then matches the order and executes the trade when a compatible price is found. The trade involves a transaction fee which has to be paid for enabling the transactions.
Popular Centralized Exchanges
There are many centralized exchange platforms available in the US. Traders must choose a secure and reliable platform to enable a seamless trading experience. Consider transaction fees, security measures, trading tools, etc before choosing the platform.
Popular centralized exchanges include,
1. Binance
Finance is one of the largest centralized exchange platforms, supporting a wider range of cryptocurrencies. The platform offers high liquidity, fast transactions, robust security, and low transaction fees.
2. Coinbase
Coinbase is one of the popular centralized crypto exchange platforms known for its robust security and friendly user interface. The platform supports more than 200 cryptocurrencies. High liquidity, enhanced speed, and competitive transaction fees make it an ideal exchange for trading crypto.
3. Kraken
Kraken is an exchange platform utilized by professional traders. With supporting more than 200 cryptocurrencies, the platform offers high security and swift transactions. A lower transaction fee is another major advantage of the Kraken exchange.
Limitations of Centralized Exchanges
Though centralized exchanges offer numerous advantages over decentralized exchanges, they are not devoid of limitations. The major limitations of the centralized exchanges include,
1. Lack of ownership
Centralized exchanges use custodial wallets, which means you are depositing your funds into an account that is controlled by the exchange. The exchange holds the private key, and a user borrows them to store their crypto, preventing them from complete control over their assets.
2. Compliance with government regulations
Centralized exchanges operate in compliance with the rules and regulations of the government. Though these rules secure the assets, they often prevent diversification, limiting the users from completely exploring the scope of crypto.
3. Increased hacks and scams
Since the assets are stored on exchanges, they are more prone to hacks and scams compared to decentralized exchanges, where users are given complete control over their assets. The breaking of private keys and looting of crypto often happen in centralized exchanges.
Final Thoughts
Cryptocurrencies are the assets of the future, increasing the number of investors in the platform. Cryptocurrencies are bought and sold through centralized and decentralized exchanges. Centralized exchanges are owned and operated by a central authority, in compliance with the rules and regulations of the government. The platform offers high liquidity and supports a large number of coins. However, the lack of complete ownership over the assets prevents many from trading through these exchanges and opting decentralized exchanges instead.