A centralized exchange is an online platform that acts as an intermediary, allowing users to buy and sell bitcoin and other digital assets.
The first centralized exchanges made their appearance in 2010. Among the pioneers of this model, one of the most well-known is Mt. Gox, a Japanese exchange that failed in 2014.
A centralized exchange, or CEX (Centralized Exchange), is responsible for managing trades between users within the platform. The exchange platform is operated by a company acting as an intermediary, with the aim of ensuring the smoothness and security of transactions among various clients. In particular, trades are executed by matching the demand and supply of specific digital assets through an order book.
Typically, a centralized exchange offers the ability to buy and sell digital assets using most fiat currencies. Deposits and withdrawals can be made through bank transfers, credit/debit cards, and other payment methods.
In addition to facilitating the buying and selling of bitcoin and other digital assets, centralized exchanges provide the service of custodianship of users’ funds. Unlike decentralized exchanges (DEX), where users have direct control of their private keys, if a user decides to store their funds on a centralized exchange, in most cases, the exchange will retain their private keys and be the actual owner of the funds. If the exchange were to fail or undergo a hacker attack, users’ funds would be exposed to a high risk.
Advantages
The main advantages of a centralized exchange include greater liquidity and transaction speed. They often have relatively low commission costs, making the use of such platforms more accessible and cost-effective.
Risks
Centralized exchanges constitute a single entity that encompasses numerous tools and services that, in traditional finance, would be distributed among different entities. For example, a centralized exchange simultaneously acts as a liquidity provider, market maker, KYC & AML compliance company, and custodian of assets.
While this concentration of tools and services can simplify the user experience, on the flip side, it involves a series of significant risks related to the security and centralization of all these aspects.
It is no coincidence that over the years, many exchanges have been subject to cyber attacks, resulting in the loss of their clients’ funds.
Below is a list of the most significant hacker attacks on cryptocurrency exchanges with their respective losses:
- MT. Gox (2014) – 850,000 BTC
- Bitfinex (2016) – 119,756 BTC
- KuCoin (2020) – 2,015 BTC
- Bitstamp (2015) – 18,866 BTC
- Binance (2019) – 7,074 BTC
Being large online platforms that gather millions of data, centralized exchanges are true “honeypots,” becoming a target for hackers.
In addition to the risk of user fund loss, a centralized exchange could be susceptible to a “data breach,” the compromise of sensitive data caused by an external attack.
