What is Centralized Exchange (CEX) and how it works?

When it comes to trading, the crypto exchanges are most reliable for multiple traders. Since the traders feel safer with the customer support and doing their first-time trade as a beginner. A centralized crypto exchange by name signifies that the exchange keeps a record of your transactions and keeps a journal of each transaction you make. Many famous exchanges are providing a multitude of services and hence even if you are a beginner and want to learn hands-on basic trading, a centralized exchange can provide you with the required safety as well as customer support. 

We would get to know, what is centralized exchange and how you can benefit from them. What features are commonly available and what sort of value proposition you can have with a proper crypto exchange? To see more depth of what a centralized exchange we need to make certain key principles in mind.

What is Centralized Exchange (CEX)?

A centralized exchange is also known as CEX and provides its users with open trading platforms. Many traders prefer using the services of centralized exchanges, as they provide multiple services such as a trading platform, where you can buy and sell your crypto assets, create an account using some basic Know-Your-Customer (KYC) guidelines, and helps to set up your account. Along with this, if you find difficulty in setting up your account, or get stuck in any process depending on the nature of your problem customer support can help you get rid of your issue and resolve them as soon as possible. 

For common trading, a centralized exchange is the number one priority for dealing in crypto and its other forms. Many traders prefer to use centralized exchanges to mark positions whether it is the spot market or options and perpetual, as they safe keep your assets, and timely notify you for what and when the current asset at stake is hitting high or lowering down. In the case of, perpetual, and swaps, the longs and shorts are also notified to the traders and offer more convenience in case your assets, margins, or collaterals are close to liquidation. 

Most of the trades that take place in a centralized crypto exchange are done through order books. An order book is a collection of buy and sell orders that are placed by the users or traders, hence maintained by the exchange itself. The process of order taking and placing happens with consideration and care. To understand things more deeply, let us look at the working of a centralized exchange. In simple terms, what does centralized mean?

How Does A CEX work?

A centralized exchange works by facilitating and doing trade on their assets and exchange for better returns. Since the word centralized denotes a singular control, therefore the assets, traders, and puny details related to all your assets are in regular check and audited timely. The centralized exchange provides regular user and customer safety since all your transactions are in regular check, and in case of any fraudulent activity, the exchange is bound to repay for the losses and reimburse the fiduciary and financial risks that may pop up. Recently, the most famous, trusted, and popular crypto centralizedexchange, Binance faced a hard brunt for a cross-chain hack, summing up to an amount of $570 million worth of assets being stolen at the hands of systematic hackers. Binance, due to its high trading volume, tackled the situation and froze the accounts of the hackers. 

Following up was a white hack program conducted, where the discovery of the bug was made and placed a $1 million bounty for identifying and chatting with the hackers. Those that identified and pinpointed the hackers received 10% of the recovered funds. But this does not make the centralized exchanges unsafe and unprotective. The safekeeping of your crypto assets is just in the hands of the exchange that already deals with humungous volumes of data pouring in second after second. If you want to invest in crypto, a centralized exchange is all-inclusive and provides regular guidelines on how to conduct your first trade, and that too with safety and compliance. 

A centralized trading platform is therefore a protector of your orders and their lists. You can place an order, make a profit, exit the trade, and even cancel it if at some point in time you feel that the desired market price of your asset pair is not hitting a specific mark. You can realign your trade or position to your satisfaction. There are no extra charges for a change of mind.

Order Matching

In the case of crypto trading, the order-matching mechanism, always work. As a novice, if you want to try out online trading and want to invest in crypto, many exchanges are providing you with a series and multitude of solutions, features, and specifications to make your first trade profitable. Famous exchanges such as Binance, OKX, and KuCoin are providing centralized features, whereas a hybrid exchange cum crypto trading platform, such as Bitflex is providing you a chance not only to trade in open centralized spot and futures market but in the decentralized environment such as well. As a user, or a trader you can take full advantage of enjoying your anonymity if you make your account in a hybrid exchange.

Counter Party Clearance

Acting as a central body to jointly open trades between different buyers and sellers, the centralized exchange also plays a key role in making sound agreements. Once you place the orders, the sellers and buyers do not know each other, as their identity is not exposed. Thus, by trading through the exchange you also take advantage of your anonymity while making the exchange as a trustee in settling your trades. To understand how the counterparty clearance process works we will understand through a simplified example. 

Let us assume you bought a crypto asset worth $1000. While you place the order on an online trading platform, the exchange or trading platform ensures that your $1000 worth of crypto buying order is matched with a sell order of the same price of $1000. Hence as the trade matches and the seller is willing to dispose of his assets, your placed $1000 worth of USD (US Dollar) is transferred to his account, and you receive your digital asset in your digital wallet. This happens in minute seconds and as there are more users and traders for any pair of assets, the trading and clearance also take place in seconds. 

Opening your account on an accredited and reliable exchange is a safe practice, as the same exchange acts as a custodian of your funds. To make your exchange act as a custodian to your funds safe and secure as well as in the event of any hack or fraud, the same exchange can reimburse against the appeared losses.

How to Cancel CEX order?

Unlike normal trading platforms that deal in commodities and currencies and their derivatives, things are different in the crypto world. In a normal trading spree, there are more chances of a crypto transaction being irreversible. As the technology upon which the entire crypto trading infrastructure is built, the processes work by making peer-to-peer transactions. Hence as the name denotes, once thetransaction is fulfilled and executed, there is no chance of it reversing or retrieving your transferred funds or money back in your digital wallet. The moment you hit the send button or transfer button; you lose custody of your assets. Your funds are only reversible in the case of the receiving party knowing you and is willing to transfer back the funds.

This irreversible feature is due to the technology made on the immutable element. Thus, making it irrefutable, absolute, and safe. In short, your transactions once made are unchangeable. Therefore, as a conscious and educated user, you should double-check each piece of information before executing a transaction. Double-checking the recipient’s wallet address and using the right network for sending and receiving funds should be kept in mind. As these are irrefutable transactions, you can lose a significant amount of your funds on account of a small mistake. A slight change in wallet address can jeopardize your crypto portfolio. So, be extra vigilant before you make any transaction.

Conclusion

When you make a certain trade, as a starter, beginner, or expert, due diligence and safety are always the key parameters for trading and even dealing in futures or derivatives. As centralized online trading, exchanges are providing you with added features every now and then, as a trader, it is your duty to be aware of what perks and inherent risks are associated with any crypto platform. Try to scrape about its credibility, trading volume, operations time, and how much safety and customer support it provides. Only then can you keep your trading risks slightly minimized and make each transaction safer and secure.