What are Centralized Cryptocurrencies Exchanges?

Cryptocurrencies and digital assets have become part of our lives. They allow us to make fast purchases and payments, invest and save personal finances, choose convenient and privacy-respecting instruments and platforms for transactions. But, like everyone else in our world, cryptocurrencies have a downside. Before starting to use digital currencies, every user is faced with the choice of a stable digital asset, a reliable crypto exchange, and a secure electronic wallet. In our article cycle of active and planned crypto exchanges, we will consider these issues in more detail. 

CEX – what is it?

To start buying and selling cryptocurrencies and other digital assets, the most direct way is to deal with crypto exchanges. Centralized digital asset exchanges (known as “CEX”) are private platforms that facilitate the exchange of cryptocurrencies, including digital,  fiat currencies and other digital assets.

Centralized digital asset exchanges act as an intermediary between buyer and seller and earn money through commissions and transaction fees. You can imagine that a CEX is similar to a traditional stock exchange, but for digital assets.

CEX facilitates digital asset transactions between buyers and sellers by providing an online trading platform that supports the order book: a set of purchase and sale orders placed by individual traders.

The CEX combines orders placed by users in the order book and then uses special software to match and execute corresponding purchase and sale orders.

A CEX usually also acts as a clearing agent and depository for your finances.

In addition, CEXs also serve as liquidity providers for supported tokens in their capabilities as market makers. Transactions on centralized exchanges are electronically verified and documented in an appropriate chain of blocks that supports relevant digital assets in cryptocurrency transactions.

Advantages of a centralized exchange

The critical advantage of CEX is the usual form of exchange trading. CEX fundamentally operates as «regular» currency exchanges, only using digital currencies and instruments.

Another advantage of some CEXs is the ability to leverage investments on the stock exchange, called margin trading. This allows investors to make higher profits, but losses and risks can also be increased.

Known Problems

The issue of CEX’s shortcomings became actual in the fall of 2022 when the largest exchanges were hacked to the tune of almost $1 billion. Then came the collapse of the famous FTX and the subsequent wave of mistrust of cryptocurrency exchanges.

So, the main drawbacks of CEX:

  • The risk of hacking. FTX, Mt.Gox – examples more than eloquent;
  • Transaction Fee. Although crypto exchanges are cheaper than «regular» exchanges, centralized exchanges often charge a high commission for their services and convenience, which can be particularly high when trading large amounts;
  • Digital asset retention and fraud risk. CEX will store your digital asset as a custodian in its digital wallet, rather than allowing you to store your keys in your own digital wallet. Although it is more convenient when you want to trade, they have drawbacks, namely the risk of a central cryptocurrency exchange failure and fraud.

Recent examples include the collapse of the $50 billion TerraUSD algorithmic stable coin and Luna’s daughter token, the bankruptcy of the Three Arrows Capital hedge fund, Celsius Network lender, Voyager Digital broker, and the sudden collapse of FTX and Alameda Research.

What’s next?

The year 2022 was marked by a powerful decline in the reputation of centralized crypto exchanges. In fact, worrying about the CEX is legitimate because of the collapse of the most prominent centralized crypto exchanges. Therefore, users are likely already considering fully distributed exchanges (known as “DEX”) as alternatives to centralized exchanges. Most importantly, the growth of the DeFi movement is an important factor in the implementation of fully distributed exchanges.

This is diva.exchange

The non-profit association diva.exchange, Switzerland, uses a barrier-free and collaborative approach to create free banking technology for everyone. The open source technology ensures the privacy of all participants in the financial system of the future. The blockchain-based system is fully distributed. Everyone can participate in diva.exchange.

Diva.exchange is committed to the belief that only commercially free technology can reliably protect user privacy.

Collaboration with the scientific community plays an important role in the development of diva.exchange. The results of diva.exchange research is constantly being validated by academic institutions and publicly presented at specialized conferences.

Learn more about our work

All technical information is available at: https://github.com/diva-exchange/

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