Cryptocurrencies are on everyone’s lips, and there is hardly a person who has never heard of bitcoin. With the explosion of digital money, numerous crypto exchanges have emerged as a key tool for buying digital currency assets. However, this variety of such exchanges is sometimes misleading for some users, so you have to spend some time to understand which types of cryptocurrency exchanges are right for your needs. So in this article, we will take a look at what types of cryptocurrency exchanges are available, the most popular ones, and also talk about some of the nuances.
Types of cryptocurrency exchanges
All cryptocurrency exchanges are divided into the following categories: centralized cryptocurrency exchanges and decentralized cryptocurrency exchanges.
Сentralized crypto exchanges (СEX)
Let’s first look at centralized exchanges. These are online platforms that trade both cryptocurrencies and regular fiat money. A centralized cryptocurrency exchange works like a public or private bank. When a customer wants to make a transaction, namely to make a purchase of some cryptocurrency, he entrusts his money to the exchange where the purchase takes place.
Before starting to interact with a centralized cryptocurrency exchange, each particular potential user requires a mandatory registration procedure, followed by a comprehensive verification process.
Each user is given an individual digital password for their own cryptocurrency vault. Even if you forget or lose your digital password key, it’s nothing to worry about, as its data can be recovered thanks to a special cryptocurrency wallet intermediary that helps recover the lost key.
Centralized cryptocurrency exchanges are as reliable as the banks we are used to, but they are not 100% protected from fraud attacks either. As a rule, a centralized exchange runs on servers with computer equipment, which is located in the main office of the company. Consequently, such exchanges can be hacked in order to steal users’ personal data and money.
These types of exchanges are abbreviated as CEX.
Advantages of CEX
Centralized exchanges have completely different functional characteristics. Smaller and simpler ones provide their users with the ability to trade cryptocurrency/cryptocurrency pairs, for example, BTC/ETH which is quite popular. Larger exchanges also provide the ability to trade fiat/cryptocurrency pairs and numerous additional features such as: farming, staking, margin trading, etc.
CEX is the most convenient platform for cryptocurrency trading that beginners can easily understand. It is enough to register or undergo KYC verification, deposit money and you can start trading crypto assets. Everything is simple and convenient.
Centralized exchanges are regulated. Most centralized exchanges are registered with the relevant financial authorities in the countries where they operate. This means that investors can track exchange owners through regulators if necessary.
Disadvantages of CEX
There is a risk of hacking. CEX can be hacked by hackers and siphon users’ funds from their wallets. At the same time, hacks are not that rare in the cryptocurrency market. Another problem could be identity theft (payment and financial information).
Centralized exchanges charge a fee for each transaction. In addition, it is necessary to pay a fee when depositing with fiat money, which can be up to 5% of the amount.
Keeping funds in the wallets of the exchange. As soon as you transfer your money to the exchange, it belongs to the exchange. The exchange can freeze a user’s wallet or even take it over.
Examples of centralized exchanges
Binance is objectively the most popular and liquid centralized exchange. It has excellent functionality, relatively low commissions, large trading volume and a variety of cryptocurrencies. It supports work with fiat money. Verification is required to use many of the features. The exchange also has tools for analytical market research. There is a multi-level security that will ensure the safety of all users’ funds.
Huobi Global is one of the largest exchanges and has a large volume of business, as well as being known for its reliability. The exchange allows you to buy both top cryptocurrencies and new coins. It is possible to trade without verification, but with some restrictions. There is classic trading and margin trading, as well as futures. The level of security is high, it is possible to connect SMS-authorization when logging into the exchange, it is also possible to link an account to email.
WhiteBIT is the largest cryptocurrency exchange in Europe, with over 3 million users worldwide. More than 450 cryptocurrency pairs are traded on the exchange, with an average trading volume of about $1 billion. WhiteBit’s fees are among the lowest on the market. Regardless of the transaction amount, the commission for trading pairs does not exceed 0.1%. The company https://whitebit.com/ cares about the convenience of its clients and offers the simplest interface and the most convenient tools for managing cryptocurrencies and fiat assets.
Decentralized crypto exchanges (DEX)
Well, now let’s talk about decentralized exchanges. As you can understand from their name – it is an exchange with a decentralized operating system. This means that it has no central administrative office. In a decentralized exchange, the user trades cryptocurrencies through peer-to-peer nets. This is the main difference between DEX and CEX.
On decentralized crypto exchanges, unlike centralized ones, users don’t need to deposit their money into the exchange’s wallet. Instead, the exchange allows its users to trade cryptocurrencies directly with other cryptocurrency exchange customers. Such exchanges are considered more secure because users do not need to trust their money to the exchange.
In terms of security, it is worth noting that decentralized exchanges use blockchain technology, so they are more secure. Fraudsters can only try to hack into the smart contract structure of a DEX exchange and the server that hosts the official website of the decentralized exchange. This is a major advantage over a centralized cryptocurrency exchange.
The client of a decentralized exchange can buy, trade various cryptocurrencies, as well as conduct transactions with fiat money.
The registration process on these exchanges is the same as on centralized exchanges: verification is mandatory.
These types of exchanges are abbreviated as DEX.
Advantages of DEX
Store funds not in the wallets of the exchange, but in users’ own wallets. Thus, users have absolute control over their assets and can decide what to do with them. In the case of a decentralized exchange, the probability of hacking is practically minimized.
Variety of crypto assets. To be listed on CEX, an asset must meet a number of requirements, such as high trading volume and regulatory compliance. Any asset can be listed on DEX, which allows users of the decentralized exchange to buy most cryptocurrencies that are not available on the centralized exchange.
There is no need for verification and KYC-verification, which allows you to maintain anonymity.
Disadvantages of DEX
However, despite their advantages, DEXs are not as popular as centralized platforms. As a result, they have fewer customers, trading volumes and liquidity, as it is harder to find suitable trades on DEX. The duration of transactions on decentralized exchanges is longer because traders have to wait for cryptocurrency and fiat transactions to complete.
In addition, decentralized exchanges do not yet have advanced trading options, such as margin trading, making them less suitable for professional traders.
Examples of decentralized exchanges
Uniswap is the largest DEX based on the Ethereum blockchain. It occupies about 40 percent of the entire market and has a wide range of cryptocurrencies. The exchange has a relatively simple interface, a wide selection of assets and the ability to create custom liquidity pools by setting different parameters. It has a high transaction speed. You do not need to register or confirm your identity to get started. Any platform user can add his tokens to the pools.
PancakeSwap is a decentralized exchange focused on digital assets. Due to its rejection of Ethereum, PancakeSwap features fast transactions and low commissions – 0.25 percent of the amount. The exchange is known for its daily $5 sweepstakes. The exchange has a huge functionality: cryptocurrency exchange, liquidity aggregation, pharming, etc.
Aave is a decentralized lending protocol on the Ethereum blockchain. The platform allows borrowing and lending crypto-assets without the participation of a central intermediary. The interaction mechanism is similar to that of any lending institution, but the work is done through cryptocurrencies. Initially, Aave protocols were intended only for lending and borrowing ETH, but with the advent of DeFi the service expanded its rebranding and capabilities, and now more than 20 tokens are available to users.
How cryptocurrency exchanges work
Regardless of the type of cryptocurrency exchange, they work according to the same algorithm:
First of all, you need to sign up: enter your username and password and confirm them by email. Then there is the verification process, which requires verification of identity by checking the user’s personal data.
To start trading, you need to deposit money into your account, either cryptocurrency or fiat money. In most cases, there is no deposit fee, but there is a withdrawal fee, which on different exchanges can range from 1 to 7 %.
The next step is to place an order to buy or sell the cryptocurrency. Some exchanges have their own service for exchanging cryptocurrencies for each other or for fiat money, which allows you to exchange immediately.
The final step is to withdraw funds to an e-wallet, bank card or electronic payment system. You can also leave your funds in the internal wallet of the exchange. The choice depends on your preferences.
What to consider when choosing a crypto exchange?
Often beginners, and sometimes not only beginners, face the problem of choosing a reliable crypto-exchange. It takes some time to understand the functionality and mechanism of centralized and decentralized exchanges. As soon as you determine the type you need, you will face a huge variability and you should rely on your own preferences.
First of all, you need to study the history of chosen crypto exchanges, if there were hacking attacks and if they happened, find information about the extent of it and how the problem was solved. Also, you should pay attention to the reviews, but not all of the reviews should be trusted. Look for reviews of the exchanger on independent sources – this minimizes the likelihood of bought reviews.
Pay attention to the conditions of the exchange and make sure that they are appropriate for you (registration and verification, commission, deposit and withdrawal, etc.).
Also consider the trading volume presented on the exchange. The more trading pairs and turnover available, the easier it will be to buy and sell coins. Trading turnover is a fairly objective indicator, because the more traders, the greater the turnover, hence – the more popular the exchange.
Important when choosing a cryptocurrency exchange is the support service. Sometimes customers have questions and ask for technical support and want to get competent detailed answers, which can help to solve the problem, rather than ready-made templates, which will do little to help.
Of course, the interface of exchanger and usability is also important.
We considered the centralized and decentralized crypto exchanges, found out the main advantages and disadvantages, the principle of the exchanges, as well as noted what you need to consider when choosing the exchange. Each platform is trying to attract new customers and keep existing ones, trying to adjust the management process and present something new. Progress is not standing still. Users only need to analyze information about crypto exchanges and choose the one that meets their requirements and needs.