A n exchange is a market where resources are traded. One famous exchange you probably know is the New York Stock Exchange, which is one of the biggest exchanges in the world, and it is centralized.
Centralization is an important discussion that bubbles up in crypto world. For most digital currency investors, the centralized cryptocurrency exchange is one of the most important vehicles for transacting. Centralized cryptocurrency exchanges are online platforms used to buy and sell cryptocurrencies.
Several investors may get the idea of a centralized exchange to be quite deceptive, as digital currencies themselves are frequently owed as decentralized.
What does it mean for an exchange of this type to be centralized, and why are these exchanges decisive for the success of the cryptocurrency industry as a whole?
Idea Behind Centralised Crypto Exchange
The idea behind this exchange refers to a middleman/third party that will help us in doing transactions. Buyer and seller trust on the third party to handle their assets. This is a common phenomenon in a bank setup, where a customer trusts the bank to hold his or her money.
A centralized exchange is run by the profit-oriented company that acquires revenue from their platform fee structures.
Classification of Crypto Exchanges
Cryptocurrency exchanges can be classified into two categories based on the extent of control over the customer’s funds: centralized and decentralized. Centralized crypto exchanges can further be categorized into
- Synchronous Exchanges
- Asynchronous Exchanges
Synchronous Exchanges: It is a small-scale exchange wherein a client’s request is granted by a single transaction. There are some limitations in their scaling abilities which results in breakdown when it comes to large volume transactions.
Asynchronous Exchanges: The exchange that independently processes requests through different layers. The interface takes user requests and adds it to a queue. Each queue runs as a service. The request is executed and the status is communicated to the interface. All these parameters are achieved by this service. It scales up a large number of transaction volumes. Each feature of the exchange runs as an independent service.
It is worth mentioning that centralized exchanges can do fiat (USD, EUR) to crypto transactions while Decentralized exchanges (DEXs), are only capable of doing crypto to crypto transactions for now due to KYC and other regulations.
ADVANTAGES TO CENTRALIZED CRYPTOCURRENCY EXCHANGES
The fame and use of centralized cryptocurrency exchanges is increasing noticeably because of the advantages they offer. These advantages stem from the centralized nature and formal structure of such altcoin platforms.
A key selling point of centralized exchanges is legitimacy and regulation. Most of the centralized altcoin platforms are approved and regulated by a government. They have to follow the law and can be held answerable if something goes wrong.
A related advantage is a higher level of clearness. Most centralized exchanges issue their ownership, their addresses, and their location. You will always have the information about the people who you are dealing with and where to find them. Some decentralized exchanges have no formal locations.
A centralized platform has a team of engineers whose job it is to maintain the platform and fix problems as soon as they occur. This can lead to a higher level of security because threats can be dealt with immediately.
A very popular aspect of these exchanges is fast customer service. There are people who you can contact quickly if something goes wrong. At some decentralized exchanges there is often no way to contact the team behind the platform.
A GATEWAY BETWEEN FIAT CURRENCY AND CRYPTOCURRENCY
The most striking characteristic of centralized exchanges is that they accept fiat currency payments, while many other decentralized platforms only accept cryptocurrencies as a mode of payment.
This allows most centralized exchanges to accept bank transfer, Visa and MasterCard credit and debit card payments. That facilitates account holders to swiftly convert fiat currency into crypto and to quickly cash out cryptos when necessary.
A linked trait that some people fail to value is that many centralized exchange accounts are insured. That means if something goes wrong you will get back your money. This can be a saver for small investors.
Many centralized platforms offer edge trading, institutional trading, discounts for high-volume trading, and Forex style trading. A lot of people use centralized exchanges simply to get up to date crypto market information
Some centralized exchanges are starting to offer different kinds of financial services counting banking, digital wallets, and crypto-debit cards. The big benefit to some of these solutions is that they allow the spending of cryptocurrency from accounts at online retailers and brick and mortar stores.
DRAWBACKS TO CENTRALIZED EXCHANGES
There are some severe restrictions and possible dangers to centralized exchanges that every investor should be aware of.
- Such exchanges typically operate on a central workstation or platform. That makes a big target for hackers and malware. All the accounts and the money in them, especially the cryptocurrency, is tempting for thieves. Since there is mostly only one platform involved, the entire exchange can go down if it is hacked.
Surveillance and tracking of transactions are simple because they go through a mid clearinghouse. This means there will be less privacy and more susceptibility to criminals and others.
- Privacy is partial with increased risks because you will have to provide a wide variety of sensitive information like bank account details, credit, and debit card information, and classification numbers. You will most likely have to provide your address and identity as well. This can make you more open to identity theft.
- It can take time to set up accounts and complete transactions. Many centralized exchanges only work during business hours and do transactions on precise days. A lot of them take time to set up accounts and may need a credit check or a deposit to open an account. A few may want you to keep an exact balance of money in your account.
- Since they are subject to regulation, centralized exchanges can be more prone to taxation and other government actions. Most centralized platforms will have to distribute users’ information with tax collectors, and accounts at them can be detained or adorned for tax purposes.
UNDERSTANDING CENTRALIZED CRYPTOCURRENCY EXCHANGES
Centralized cryptocurrency exchanges are very useful that can help you enlarge your holdings and make money if you use them properly. Anybody who is serious about altcoin investing and trading will have to join a centralized exchange at some point.
Those who want to invest in digital currencies; can turn towards these kinds of exchanges. Some of these exchanges include Coinbase, Robinhood, Kraken, & Gemini.