A cryptocurrency exchange is a platform where you can buy or sell cryptocurrencies. A crypto can be traded for another on an exchange. For example, you can convert Bitcoin to Litecoin. You can also buy crypto using a fiat currency like the U.S dollar and euros on an exchange. Cryptocurrencies can also be converted back into fiat currencies on an exchange, which you can withdraw to your regular bank account or keep as cash in your account (to trade back into crypto later).
It's essential to understand the difference between crypto-to-fiat and crypto-to-crypto exchanges. Only cryptocurrency pairs are listed on crypto-to-crypto exchanges, whereas fiat-to-crypto exchanges allow you to buy and sell cryptos using dollars, pounds, yen, euros, and other fiat currencies.
Fiat to Crypto Exchanges
When it comes to crypto exchanges, it is possible to convert fiat currency into cryptocurrency and vice versa. Many traders convert cryptocurrency to fiat currency based on the changes in crypto value. One can either make a profit or a loss from this process. Fiat to crypto exchanges is more widespread than crypto to crypto exchanges.
Crypto to Crypto Exchanges
Only crypto to crypto exchanges are allowed on some platforms. An excellent example is a platform that lets you exchange Ethereum with Bitcoin, but does not allow you to trade the same Ethereum for dollars. To use a platform like this, you must first buy crypto with real money and then transfer it to the platform.
What Are the Types of Cryptocurrency Exchanges?
Cryptocurrency exchanges are classified into three categories:
1. Centralized Exchanges (CEX)
Centralized exchanges, also known as traditional crypto exchanges, are far more popular than decentralized exchanges. Private companies own and run the platforms that operate such types of exchanges. These platforms are run from a local or “central” server in the private company’s possession. As a result, centralized exchanges are more exposed to several types of external security threats such as hacks.
At the time of writing, the top 10 centralized exchanges according to Coinratecap are Binance, Huobi Global, Coinbase Exchange, FTX, Bitfinex, Kraken, KuCoin, Bithumb, Gate.io, and Binance.US.
The advantages of centralized exchanges include:
It has a higher trade volume compared to decentralized exchanges
Allows for fiat-to-cryptocurrency trades.
Offers high liquidity
Below are some of the disadvantages of centralized exchanges.
It is more vulnerable to hacks compared to decentralized exchanges
Can be shut down by government regulations
2. Decentralized Exchanges (DEX)
A decentralized exchange, often referred to as DEX, is a cryptocurrency exchange that functions as an alternative to the traditional, centralized exchange. A DEX is not dependent on a company or service to manage a customer's assets. Instead, the transactions or trades are controlled by an automated process that operates without the presence of a central authority. The trades are considered customer-to-customer or peer-to-peer.
Using blockchain technology, DEXs are built to ensure that there is a secure way to trade cryptos without the need for a central figure. DEX platforms essentially act as a service that connects trade orders so that customers looking to exchange tokens can do so. The majority of DEX operate using Ethereum's blockchain to perform services via the use of smart contracts.
At the time of writing, the top 10 decentralized exchanges according to Coinratecap are Uniswap, PancakeSwap, MDEX, MDEX (BSC), 1inch Liquidity Protocol, Uniswap, SushiSwap, 1inch Exchange, KLAYswap, and Honeyswap.
Below are some of the advantages of decentralized exchanges.
Offers high security from hacks due to distributed nodes
Cannot be shut down by the government due to the distributed global nodes
There is no central company
The disadvantages of decentralized exchanges include:
Lower trade volumes compared to centralized exchanges
Often targeted as black markets for illegal products since they don’t require an ID for registration.
Have low liquidity
Currently, only crypto-crypto trades are available
3. Hybrid Cryptocurrency Exchange
Hybrid crypto exchanges are exchanges that combine the positive features of centralized and decentralized exchanges. These exchanges address the shortcomings of centralized and decentralized exchanges. The security and anonymity of decentralized exchanges and the liquidity and usability of centralized exchanges are adopted in hybrid exchanges.
With hybrid crypto exchanges, users have complete control of their funds and they are not required to turn them over to a custodian. Users can also trade their digital assets directly from their wallets while depositing tokens into the powerful smart contract.
Examples of hybrid crypto exchanges are the Qurrex hybrid exchange, Eidoo hybrid exchange, and Legolas hybrid exchange. You can learn more about hybrid crypto exchanges here.
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