You may have used a cryptocurrency exchange already — without even knowing it.
Don’t worry if you haven’t used one before. You’re still in the right place.
If you have used cryptocurrency exchanges before, it might surprise you that there’s a little more to crypto exchanges than you might have thought.
Before diving into cryptocurrency exchanges, I’d recommend you brush up on the following.
What is a Cryptocurrency Exchange?
A ‘cryptocurrency exchange’ is where traders go to buy and sell cryptocurrencies.
They’re not that complex. But first, let’s cover on the basics incase you’re unfamiliar with them.
Let’s breakdown ‘Cryptocurrency Exchange’ into two simple parts:
Currency that is cryptographic.
The ‘-currency’ part means ‘money’ or ‘value’. The ‘crypto’ part is in reference to the cryptographic hashing algorithms that keep the the currency secure.
Exchanges are platforms where people can trade (buy and sell) assets.
Assets can be anything — cryptocurrencies, fiat-money, contracts, cars, food, Nike sneakers, oxygen, any store of value.
Exchanges match buyers and sellers by providing markets. Markets are where buyers and sellers place their orders. When a buyer’s order and seller’s order ‘execute’ at the same price, the trade (swap) occurs.
Let’s say you want to buy some fish. So you go to a food exchange that has a Fish/Money market.
A fisherman has put in a sell limit order to get rid of his 1000 fish. He wants $5 per fish. You place a buy market order to buy 10 fish with your Money at market price ($5), totalling upto $50.
The Exchange matches the two orders and a trade occurs. You get 10 fish (minus any fees) and the fisherman gets $50!
Why do people use cryptocurrency exchanges?
There are numerous reasons why people use cryptocurrency exchanges. But there are a few common ones that we can discuss.
Reasons why people use cryptocurrency exchanges
For the most part, people use cryptocurrency exchanges to place orders.
These orders are usually to either buy or sell cryptocurrencies or some type of ‘crypto pegged contract. Here are some examples of reasons why people use cryptocurrency exchanges:
- Storing funds
- Providing liquidity
- Yield farming
Each person will have their own reasons for using exchanges.
Types of people that use cryptocurrency exchanges
The limits are boundless, but the common types of people that use cryptocurrency exchanges are:
- Traders — People using cryptocurrency exchanges to profit on speculated changes in price.
- Investors — Long term holders looking for growth opportunities
- Complex financiers — People that could be looking to hedge against exposure to cryptocurrencies for a large firm, or manage investment portfolios for clients.
- ‘Miners’, ‘Stakers’, ‘Farmers’ — People selling cryptocurrencies they have earned from mining or staking or yield farming. Or, people looking to stake or farm cryptocurrencies using services provided by the exchange.
- Businesspeople that accept cryptocurrency payments — Many entrepreneurs, and companies, accept cryptocurrencies as payment. They then exchange currencies for less volatile alternatives — fiat, stable coins, pegged tokens.
Types of Cryptocurrency Exchange
There are two main types of cryptocurrency exchange. Centralised exchanges and decentralised exchanges.
You may not recognize the difference between the two. And often the lines between them are blurred. But they’re easy to identify when you know what they are.
Centralized cryptocurrency exchanges (CEX)
Centralized exchanges are usually companies, like Binance, Coinbase or KuCoin. The exchange, its software, services, and ownership rights are all owned by someone or some entity. Thus, they are centralized and considered ‘controlled’ by a central authority.
What does CEX mean?
CEX is simply the abbreviation used for "CEntralized eXchange".
Pros of centralized cryptocurrency exchanges
- You can be sure that they are following regulatory requirements.
- Your exchange is probably insured against losses, theft and damage.
- You will have access to a dedicated support team.
Cons of centralized cryptocurrency exchanges
- They are prime targets for cybercriminals; both hackers, fraudsters and phishers.
- They are not able to offer privacy due to AML/KYC rules in most countries.
- They often upsell dangerous financial instruments, such as highly leveraged futures products, to beginners.
Decentralized cryptocurrency exchanges (DEXs)
Decentralized cryptocurrency exchanges are usually hosted on a smart-contract enabled blockchain, such as Ethereum. They tend to be to open-source projects, with communities working on the code and governance-enabled voting on changes. But, the line between whether the actual exchanges are owned and operated centrally is a grey area for most.
While there are some completely decentralized exchanges, the most popular ‘decentralized’ exchanges — such as PancakeSwap, Uniswap, and Pangolin — all seem to have centralized power structures, though mostly this centred around staffing, development and marketing efforts.
Generally, decentralized exchanges interact directly with your wallet, instead of requiring you to deposit funds directly on the exchange. This is perfect if you’re considered about privacy and safety.
What does DEX mean?
DEX is the abbreviation used for ‘DEcentralized eXchange’.
Benefits of using decentralized cryptocurrency exchanges
- You get full control over your cryptocurrency, your wallet and your private keys.
- You usually get to maintain privacy, as there are rarely KYC requirements.
- You can vote in how the exchanges are governed, as the exchanges are community owned.
Downsides of using decentralized cryptocurrency exchanges
- You may incur larger fees on blockchains with high ‘gas’ fees, like Ethereum.
- You may not be able to trade the advertised currencies if there is little or no liquidity.
- You will not be insured against losses, hacks, glitches.
What are the most popular cryptocurrency exchanges?
Most popular centralized cryptocurrency exchanges