If you’re new to the world of cryptocurrency, you might be interested in investing in crypto and/or trading. Crypto exchanges are the best places to trade in cryptocurrencies, and these exchanges are quite similar to conventional stock changes. However, there are some differences as well.
In this post, we’ll take you through what crypto exchanges are and how they work. So, let’s begin!
What are Crypto Exchanges?
Cryptocurrency exchanges are online platforms that allow people to exchange government-issued currency or fiat money for cryptocurrencies. These cryptocurrencies can be traded on these platforms, and once you register profits, you can convert the cryptocurrencies into fiat money.
There are three types of crypto exchanges – centralized exchanges (CEX), decentralized exchanges (DEX), and hybrid exchanges.
How do The Different Exchanges Work?
1. Centralized Exchanges(CEX)
Centralized exchanges or CEXs are the most commonly-used cryptocurrency exchanges by crypto traders. These exchanges feature full regulation and central authorities are responsible for controlling them. This type of crypto exchange is almost exactly like a conventional stock exchange. All activities that traders conduct on these exchanges are governed by companies that facilitate crypto trading.
Coinbase and Binance are two examples of centralized exchanges.
2. Decentralized Exchanges(DEX)
Decentralized exchanges or DEXs are peer-to-peer marketplaces through which sellers, buyers, and investors can directly connect with each other. These exchanges don’t feature any intermediaries, unlike centralized exchanges. The core principle of DEXs stays true to the decentralized nature of cryptocurrencies, i.e. they aren’t controlled or regulated by any authority.
IDEX is the most popular DEX when it comes to Ethereum trading. If you want to trade in Litecoin and Bitcoin through a DEX, Waves DEX is your best bet.
3. Hybrid Exchanges
Hybrid exchanges aim to combine the strengths of centralized and decentralized exchanges while minimizing their weaknesses. These next-gen crypto marketplaces are still not as popular as CEXs and DEXs. However, in future, their acceptance is bound to grow.
What are The Pros and Cons of The Different Exchanges?
Now that you know the basics of how different crypto exchanges work, it’s time to look at their respective advantages and disadvantages. Let’s start this section with the pros of centralized exchanges:
- Centralized exchanges operate like banks and act like custodians of investors’ money.
- CEXs facilitate fast transactions and have high liquidity.
- Some CEXs offer crypto/crypto pairings while others offer fiat/crypto pairings
Now, let’s take you through the cons of centralized exchanges:
- No private keys for accessing wallets.
- KYC verification and regulations apply to centralized exchanges.
- All CEX trades are conducted on the databases of the exchanges, which make them prone to cryptojacking and other forms of cybercrimes.
Decentralized exchanges offer their very own advantages, such as:
- No government control or regulations apply to decentralized exchanges.
- DEXs offer more in terms of privacy and trading control than CEXs.
- Security features offered by DEXs are superior to those offered by CEXs.
- All transactions on a DEX are automated, i.e. they aren’t dependent on any company or intermediary.
Some of the limitations of decentralized exchanges are:
- DEXs feature low trading volumes, slow transactions, and low liquidity due to lack of central control and limited functionality.
- Cryptocurrencies can only be traded for other cryptocurrencies on DEXs, unlike CEXs, where crypto can be traded for fiat currencies.
- If traders mistakenly send funds to wrong wallets, the transactions can’t be cancelled and the funds can’t be retrieved.
Last but not the least, hybrid exchanges have several pros to offer as well:
- All solutions incorporated in a hybrid exchange are on blockchain tech.
- Hybrid exchanges feature cold wallet fund storage, which keeps investors’ funds safe from cybercrime.
- Hybrid exchanges are compliant with digital laws and provide real-time access to traders.
- Third parties may be involved in trades on hybrid exchanges. However, the exchanges would still allow users to keep their funds.
Which Exchange Should You Start Trading on?
So, now that you know about the different crypto exchanges, how they work, and what their pros and cons are, you may be wondering which exchange you should start trading on. Well, the answer to that conundrum is dependent on the volumes you want to trade and how fast you want the transactions to be.
If your trade volume is high, it’s best to opt for a centralized exchange. However, if your trade volume is low, you can go for a decentralized exchange. Hybrid exchanges are still being developed and if you want to trade on one, we advise waiting for a while until a particular exchange becomes popular.