Centralized Exchanges: How They Work and Why Traders Choose Them

Cryptocurrency trading has become more accessible, but it remains complex and risky. Prices change dramatically, and anyone looking to enter this world must understand trading tools. Centralized exchanges are the primary method traders use to exchange cryptocurrencies. Whether you’re just starting out or an experienced investor, understanding how these platforms work is critical for making informed decisions.

What Are Centralized Crypto Exchanges

A centralized exchange (CEX) is a web service where users can buy, sell, and trade cryptocurrencies. The main feature of such platforms is that they are managed by a single company or organization responsible for all operations, security, and compliance.

The first crypto exchanges were almost entirely anonymous—no identity verification was required. However, as trading volumes grew and regulators increased pressure, the situation changed. Today, centralized platforms are required to perform identity verification (KYC—Know Your Customer). This means you need to provide documents and confirm your identity before trading.

Evolution of CEX: From Anonymity to Regulation

The history of centralized exchanges shows how the industry adapts to legal requirements. When exchanges first appeared, anonymity was the norm. Traders could trade without revealing personal information. This attracted users but also raised concerns among regulators about money laundering and illegal activities.

Gradually, major exchanges voluntarily implemented KYC rules. This allowed them to obtain legal status and cooperate with banks. Today, almost all serious platforms require verification. While this is more complicated for users, it provides confidence in the security of their funds.

How Trading Works on Centralized Exchanges

How does buying and selling work on a CEX? The process looks like this:

You create an account, complete verification, and deposit funds. Then you place an order to buy a certain amount of cryptocurrency. This order enters a special “order book”—a registry of all active buy and sell orders. When a seller’s order matches your buy order, the system automatically matches them, and the transaction is executed.

For each transaction—both buy and sell—the platform charges a fee. This is the main source of revenue for centralized exchanges. The fee size varies (usually 0.1-0.5%), but over time, these amounts accumulate.

An important point: you are not buying cryptocurrency directly from the exchange but from another user. The exchange acts as an intermediary, facilitating the matching of demand and supply.

Range of Services: Why Traders Prefer CEX

Centralized exchanges offer much more than just buying and selling. These platforms provide various types of orders:

• Limit orders—specify the price at which you are willing to buy or sell
• Stop-loss orders—automatic selling when the price drops to a certain level
• Margin trading—investing with leverage
• Staking—earning interest on holding cryptocurrencies

CEX also offer custody services. When you deposit funds on the exchange, it stores most assets in so-called “cold wallets”—systems not connected to the internet. This protects against hacks. Only a small portion of funds (for liquidity) is kept in “hot wallets” accessible online.

High liquidity is also crucial. Large platforms have huge trading volumes, enabling quick order execution with minimal slippage.

A Transparent Look at the Drawbacks of Centralized Platforms

Despite convenience, centralized exchanges have serious disadvantages.

Security remains the main risk. Although platforms invest heavily in protection, hacks happen. Usually, they occur due to human error or unpatched vulnerabilities in the code. The best protection is not to keep funds on the exchange longer than necessary. After trading, transfer your cryptocurrencies to a personal wallet or, better yet, to a “cold storage” (hardware wallet).

Fees are another issue. They are charged for each order, and over time, these costs can add up.

Custodial storage is the most fundamental drawback. When your funds are on an exchange, technically, the platform owns them, not you. There’s a well-known crypto saying: “Not your keys, not your coins.” An exchange can freeze or confiscate your assets at any time. You do not fully own your wealth.

CEX vs. DEX: Choosing a Platform for Your Trading

Growing dissatisfaction with the restrictions of centralized exchanges has led to an alternative—decentralized exchanges (DEX). They operate via smart contracts without intermediaries and allow you to trade directly from your wallet.

For a long time, DEXs were inconvenient due to low liquidity. Everything changed with the advent of automated market makers (AMM). Now users can deposit their tokens into liquidity pools and earn rewards, while the platform uses these funds to execute orders.

Advantages of DEX: true security (no need to verify identity), full control over your keys, no platform fees. Disadvantages: lower liquidity, more complex to use, no fiat-to-crypto purchase services.

Which to choose? Centralized exchanges remain the best choice for beginners—they are more user-friendly and offer more trading pairs. DEXs are ideal for experienced users who value privacy and full control.

Frequently Asked Questions

What is CEX?
CEX stands for “centralized exchange.” It is a platform managed by a company where you can trade cryptocurrencies. CEXs are more convenient but less aligned with the spirit of decentralization.

What are popular examples of CEX?
OKX is one of the largest centralized exchanges. It offers a wide range of trading tools and also has a decentralized version (OKX DEX) for users preferring DEX.

How safe are centralized exchanges?
Major platforms employ multi-layered security, including two-factor authentication, cold storage, and asset insurance. However, risks remain—full security is only guaranteed with personal custody.

Is a centralized exchange bad?
Not necessarily. Centralized exchanges provide convenience, liquidity, and support that are important for most traders. The question is more about their divergence from the original crypto philosophy—full decentralization and independence from third parties.