Types of cryptocurrency exchanges
Cryptocurrencies are quite a new term for many people. The first to see the light of day was Bitcoin in January 2009, so as you can see, the crypto industry is still in its infancy.
One of the biggest businesses in the crypto sphere is to own cryptocurrency exchange with significant profits daily. And the new concepts such as decentralized exchanges or derivate exchanges arise almost every day.
In this article, we will focus on the types of cryptocurrency exchanges, trying to compare decentralized exchanges vs centralized ones and make things easier for you to understand the differences.
How to buy and trade cryptocurrencies
Traders want to buy cryptocurrencies and trade them with each other. This is why crypto exchanges are in such a need in this industry. They allow them to buy, sell and trade their cryptocurrencies instantly, some of them serve as the fiat gateways as well, so you can even use your bank account or credit card to purchase some cryptocurrency assets.
There are various approaches to the crypto-exchange business. Some exchanges focus on ease for the customer, others offer low trading fees, some try to educate their customers from the very beginning, and on the other hand, there exist those who are oriented on the professional traders.
Let’s cover the ways, how to purchase and trade cryptocurrencies. You have several options, how to do that.
1. Classic exchange process
The classic process of cryptocurrency exchanges is focused on trading similar to a stock exchange. With your fiat money or another crypto, you can exchange your assets by placing a limit order that would go to an orderbook and wait there until matched or by placing a market order that would be instantly matched with buyers and sellers requests already available in the exchange's depth of market (DOM).
2. Peer to peer crypto exchanges
This type of exchange is not limited to cryptocurrencies, p2p exchanges are very popular in the traditional markets as well. Its representatives are Over-the-counter desks (OTC), where you buy or sell an asset from some other individuals or companies, but confidentially. There is no order book and no direct effect on the price of the underlying asset. A typical example in the crypto sphere is the website LocalBitcoins.com, where supply meets demand in the meaning, they trade peer to peer. Mostly without a middleman, but some OTC trading desks might be used as well, where they charge fees for the mediation. OTC serves primarily for large amounts of crypto, which might have affected the price of the traded asset. Typically, it is used by large venture capital companies, hedge funds, and last but not least, for the cryptocurrency miners.
3. Brokers and CFDs trading
By using a broker, buyers & sellers can find the counterparty for their trade, which can also be the broker himself. The middlemen (broker) will take a fee of the trade but brings both parties’ safety and security. A broker can enable users to utilize CFD trading as well, with which you can trade almost all assets from stocks to cryptocurrencies. In CFD trading, no party owns the physical asset in contrast with the classic exchange process.
4. Derivatives exchanges
The last opportunity is to use derivatives exchanges. So what is derivates exchange and what are the advantages of its usage? In the derivatives market, you are trading the underlying asset price, so you can use various types of benefits to maximize your profit if traded properly and successfully. One of the biggest advantages of derivates exchnages is the high leverage trading with instruments like futures or perpetual swaps.
Types of cryptocurrency exchanges
Centralized exchanges
CEXes are most known and traditional in the crypto sphere. They are governed by a company that offers the options of both crypto-to-crypto trading and fiat-to-crypto gateway.
CEX is a place, where buyers meet sellers on some centralized platform in the meaning that someone handles your crypto and is responsible for it.
You can use the order books for your trades and in some advanced exchanges even some technical analysis tools.
The biggest advantages are that CEX is easy to use and has great UI and UX, which go along with the quick response. In some of them, you simply register with your email, write down your password and you can trade.
You can be sure, that the biggest exchanges have not only a great reputation but high trade volumes and liquidity, so the trading spread is not as big as in some other types we will talk about in the next chapters. Some trading platforms such as Stormgain or XCOEX go even further in this and offer liquidity aggregation, a process that gathers buy and sell orders from different sources and, as a result, provides traders with the prices close to market average with minimal spread.
Here you can read more about liquidity aggregation, and explore the product dedicated for this purpose.
Customer support, various trading pairs, and fiat gateways are often offered by CEXes, and most of the time you can benefit from additional services such as staking, savings opportunities, or IEOs (Initial exchange offers). They also add services known from DeFi. Some of you might ask, what is DeFi in crypto or what is decentralized finance? In a simple way, those are decentralized instruments that you might know from the banking sector such as lending or borrowing of crypto, but without a middleman.
On the other hand, while using CEX, you aren’t the owner of the private keys, so there is still a slight chance that CEX could be hacked as it happened with Mt. Gox, HitBTC, or Coincheck. Some people feel uncomfortable sharing their private data in the KYC process as well, so this might be a barrier for a few people.
The most popular centralized exchanges are Binance, Coinbase and Huobi.
Decentralized exchanges
DEX is an alternative to CEX without a central point of failure, no company is in charge of the assets. In comparison with traditional CEX, the transactions and trades are automated by using smart contracts and decentralized applications.
This way is much more secure because there is no possibility of a security breach if the smart contract is well written of course.
DEX is simply just a service platform, which connects buyer and seller, who wants to exchange their tokens.
Because the most advanced blockchain with the largest number of tokens (ERC-20 tokens) is Ethereum, most of DEXes operate using Ethereum and its smart contracts, most of them can't even handle Bitcoin for trading. This might be upgraded by arriving on decentralized finances (DeFi) on an interoperable platform such as Polkadot and Cosmos. With their usage, the limits for trading will be much lower.
Because no company is responsible for the run of DEX, it's harder for governments and regulators to shut them down. But the price for decentralization is on most DEXes low trading volume, small liquidity, lower speed, and poorer UI which makes them harder to use.
Some DEXes are focused merely on experienced users. You can’t contact customer support for help on DEX and they don’t provide a fiat-gateway as CEX does.
The most known decentralized exchanges are Binance DEX and Uniswap.
Hybrid cryptocurrency exchanges
What is hybrid cryptocurrency exchange? Simply it’s the kind which is taking advantage of each CEX and DEX. It is the combination of fast transaction speed you can find in centralized platforms and security assurance by still holding the private keys.
Hybrid types are a new generation of the crypto trading marketplace, but still “under development”. The most popular hybrid types are Nash exchange and Qurrex exchange.
Decentralized exchanges vs centralized exchanges
Let’s compare the centralized and decentralized exchanges as the result will be individual for each one of you. For better understanding, we used the comparison table.
Centralized vs decentralized exchanges comparison table
| Centralized exchange (CEX) | Decentralized exchange (DEX) | Hybrid exchange (HEX) | |
|---|---|---|---|
| UI & UX | Easy to use | Hard to use | Easy to use |
| Matching speed | Very fast | Slow | Fast |
| Custody | Users trust the CEX | Users own their funds | Users own their funds |
| Trading volume | High | Low | Low |
| Liquidity | High | Low | Low |
| Features | Unlimited | Limited | Limited |
| Fiat gateway | Yes | No | Yes |
Regulations and licensing for DEX and CEX
Most CEXes are licensed and regulated by the government. In some jurisdictions, crypto exchanges can be banned – it already happened in China, South Korea, India, or Russia so for CEX is better to comply with the rules.
Decentralized exchanges have no intervention from government and regulations. Simply, they can’t be shut down. That is their biggest advantage, which brings various limitations in it as well, customer support is not on their side.
Conclusion
It’s up to you to decide, which type of cryptocurrency exchange will solve the best for your needs. If you are going to purchase your crypto with fiat, you will need to use CEX or HEX. The same thing is when you desire to trade many kinds of different altcoins because DEX is mostly limited to ERC-20 tokens or some limited number of cryptocurrencies.
Traders who want to handle their taxes and statistics about all trades can use some centralized exchanges that can easily help with that.
DEXes and hybrid exchanges are rather focused on more experienced users, who use solely their hardware wallets and want to have every Satoshi under their full control. But they sacrifice some other qualities provided by centralized exchanges. User experience, high trading volume and liquidity, as well as additional services like Initial Exchange Offerings (IEO), DeFi products, and so on.
In conclusion, if you choose some prestigious and well secured CEX, you can even earn more crypto by using their features such as staking or lending so your crypto actually works for you even when you sleep – and that counts!