What is a cryptocurrency exchange?
A cryptocurrency exchange is a website that allows users to do different things: buy cryptocurrencies via fiat money, change them into fiat money, and also change them into each other. As we previously mentioned, cryptocurrency exchanges are completely online. Being online is logical due to the digital nature of cryptocurrencies.
Cryptocurrency exchanges may have different regulations for registration. Some necessitate their users to pass KYC (Know Your Customer) processes, while others only require an email address. The need for KYC may also depend on the amount you trade or withdraw daily. For example, withdrawing more than a certain amount may be allowed only for users who have passed KYC.
The price of assets in cryptocurrency exchanges is usually determined based on supply and demand. You may still wonder how cryptocurrency exchanges work precisely and where they get their liquidity. We will answer this question in the next part.
How do cryptocurrency exchanges work?
Cryptocurrency exchanges work in two ways:
You buy the assets from the exchange or sell them to the exchange directly.
The exchange works as an intermediary between buyers and sellers and connects users with inverse orders to each other.
In the first situation, the exchange has a great deal of liquidity. It buys users’ cryptocurrencies in return for fiat money and also sells cryptocurrencies to them. In the second situation, the exchange is just an intermediary between buyers and sellers. These exchanges have something called an “order book.” Users record their buy and sell orders in this order book. Users with inverse orders are then connected, and the exchange gets some percent of each trade as its fee or commission.
Different types of cryptocurrency exchanges
Aside from what we explained up to this point, cryptocurrency exchanges have two types of centralized and decentralized today. Centralized exchanges are older and have been with cryptocurrencies since the beginning, while decentralized exchanges are relatively newer and a bit different. Let’s take a look at these two different types of exchanges.
Centralized exchanges
A single person or a centralized team governs centralized exchanges. Most cryptocurrency exchanges you know (including Binance, Coinbase, Bitfinex, Kraken, KuCoin, and Huobi) are centralized ones. Centralized exchanges have complete control over users’ cryptocurrencies. They act like custodian entities. They don’t give private keys to the users, and users’ assets are held in the exchange’s wallet.
Decentralized exchanges (DEX)
Decentralized exchanges are smart contracts running on different blockchains like Ethereum (and other smart-contract-supporting blockchains). They don’t require any KYC or registration. The only thing you need to do is to connect your wallet to these exchanges and start trading. Decentralized exchanges don’t have access to your private keys. Using decentralized exchanges, you make the trades from within your wallet directly.
Even More Differences Between Decentralized and Centralized Exchanges
Another big difference between decentralized and centralized exchanges is that a single manager doesn’t run decentralized exchanges. All users of a decentralized exchange are its governors. This is more in line with the decentralized nature of cryptocurrencies.
However, decentralized exchanges suffer from several challenges. First, their fees depend on the traffic of the blockchain on which they run. For example, Uniswap, the world’s largest decentralized exchange, runs on Ethereum, and its fees go up significantly from time to time due to Ethereum’s high traffic.
Another challenge is that decentralized exchanges are still less popular and have less liquidity. Therefore, you may not be able to sell your cryptocurrencies at a fair price whenever you wish. SushiSwap, PancakeSwap, Curve, and Balancer are other famous examples of decentralized exchanges.
Conclusion
A cryptocurrency exchange is a virtual foundation that lets users buy, sell, and trade cryptocurrencies. These exchanges have different types based on their functions and services. We tried to introduce and explain these different types in this article. Now you know what a decentralized exchange is and how it differs from a centralized one. Which will have a more significant share in cryptocurrency trades in the future?
What are cryptocurrency exchanges?
Cryptocurrency exchanges are online platforms that allow users to buy, sell, and trade cryptocurrencies.
What are the types of cryptocurrency exchanges?
There are several types of cryptocurrency exchanges, including centralized exchanges, decentralized exchanges, peer-to-peer exchanges, and derivatives exchanges.