Have you ever wondered why cryptocurrency exchanges are centralized when cryptocurrencies themselves are decentralized? Why are these exchanges necessary for the success of the industry?
Keep reading this article to learn more about cryptocurrency exchanges.
Centralized crypto exchanges are platforms where you can buy and sell cryptocurrencies. It plays an important role in mediating transactions on the blockchain network.
Who is the ‘centralized’ authority in centralized cryptocurrency exchanges? These exchanges are owned and operated by third-party applications or intermediaries. These exchanges act like banks that mediate transactions.
Centralized cryptocurrency exchanges provide security of transactions and monitor them in a timely manner, for comparatively less fees.
How Does A Centralised Cryptocurrency Exchange Operate?
Centralized crypto exchanges work in the model of traditional financial organizations such as banks, stock exchanges, and other financial organizations.
They allow users to create accounts, deposit their funds, and conduct transactions using cryptocurrencies.
These exchanges also require you to provide your KYC details to verify your identity.
Centralized crypto exchanges link users together through a system called an order book.
The buying and selling activities are recorded in this order book. Centralized crypto exchanges also store cash or cryptocurrency in the user’s accounts.
Unlike decentralised crypto exchanges which are run by blockchain technology, Centralised crypto exchanges are governed by a centralised authority. They offer customer support and have a more user-friendly interface.
What are the Benefits of Using Centralised Cryptocurrency Exchanges?
Centralized cryptocurrency exchanges provide the following benefits to their users.
Fast Transactions
Centralized crypto exchanges are fast and efficient in conducting transactions.
Reputation
Cryptocurrency transactions are widely viewed with skepticism. So, their credibility and reputation increase when they are validated by a centralized exchange.
Ease of Use
Centralized crypto exchanges have a well-organized system of operations, which makes it easier to use for everyday transactions.
Insurance
Centralized crypto exchanges ensure the safety of their users and transactions and cover any potential losses through insurance policies.
What are the Risks Involved in Using Centralised Cryptocurrencies Exchanges?
Even though they have many advantages, centralized cryptocurrency exchanges come with associated risks.
The risks that a user may face while conducting transactions through centralized crypto exchanges are given below.
Less Privacy
As centralized crypto exchanges use a traditional method of transaction, they do not offer much privacy to the users.
The user data will be available in the public domain.
Bankruptcy Risk
There is a high chance that centralized crypto exchanges may go bankrupt if the borrowers do not repay the loaned amount or the depositors withdraw their investments prematurely.
Less Variety
Most centralised crypto exchanges do not offer a wide variety of currency types for traders to choose from as their priority is ensuring safety.
Security Risks
Centralized exchanges are more prone to hacking and other security threats.
Custodial Risks
Centralized crypto exchanges have complete custody of the user’s assets. If any hacking or other security issues occur, then they will lose control over all these assets.
Market Manipulation
Centralized exchanges have often been accused of facilitating market manipulation by trading against their own users or providing preferential treatment to certain traders. So users beware of such risk exposures.
Loss of Control
Users of centralized crypto exchanges may not always have access to their private keys.
The control of the private keys would be in the hands of the exchange. So users will lose control over their cryptocurrencies.
The Bottom Line
As you have read from this article, Centralized crypto exchanges have their own risks and benefits. Even then, they are still trusted by most investors as far as cryptocurrency trading is concerned.
It has many benefits such as ease of use, security of the traditional form of operation, and the swiftness of transaction.
However centralized crypto exchanges are also prone to many risks in their operations.
So if you are planning to invest in cryptocurrency and intend to use any centralized exchange platform, study its benefits and drawbacks and make informed decisions.
