What is a Cryptocurrency Exchange?

 

What are Cryptocurrency Exchanges?

The buying and selling of cryptocurrencies and other digital assets happen on Crypto Exchanges. Cryptocurrency exchanges are privately-owned platforms that facilitate the trading of cryptocurrencies for other crypto assets, including digital and fiat currencies and NFTs.

There are two types of Cryptocurrency Exchanges

1.      Centralized Cryptocurrency Exchanges (CEX)

CEX acts as an intermediary between a buyer and a seller and make money through commissions and transaction fees. CEX can be thought as a stock exchange, but for digital assets. Popular CEX are Binance, Coinbase Exchange, Kraken and KuCoin and they are much like stock trading websites or apps, allowing the cryptocurrency investors to buy and sell digital assets at the prevailing price, called spot or to leave orders that get executed when the asset gets to the investor’s desired price target called limit orders.

 

Advantages of CEX

·      User-friendly-CEX offer beginner investors a familiar(friendly) way of trading and investing in cryptocurrencies. Users of CEX can log into their accounts to view their account balances and make transactions through applications and websites.

·      Reliable-CEX facilitates the transaction through developed centralized platform with higher levels of comfort.

·      Leverage-Gives the option to leverage your investments using borrowed money from the exchange, called margin trading.

Disadvantages of CEX

·      CEX are operated by companies that are responsible for the holdings of their customers. Large exchanges usually hold billions of dollars’ worth of bitcoin, making them a target for hackers and theft. For example, Mt.Gox was the world’s largest cryptocurrency exchange company before it reported the theft of 850,000 bitcoins, leading to its collapse.

·      Transaction fees-Unlike peer-to-peer transactions, CEX charges high transaction fees for their services.

·      Custody of digital assets and risk of fraud-CEX hold your digital assets as a custodian in their own digital wallet rather than allowing you to store your private keys on your own digital wallet. 

 

2.     Decentralized Cryptocurrency Exchanges (DEX)

DEX is another type of exchange that allows peer-to-peer transactions directly from your digital wallet without going through an intermediary. Examples of DEX include Uniswap, PancakeSwap, dYdX, and Kyber. These DEX rely on smart contracts, self-executing pieces of code on a blockchain. There smart contracts allow for more privacy and less slippage (or transaction costs) than a CEX. Even though smart contracts are rules-based, the lack of an intermediary third party means that the user is left to their own, so DEXs are meant for sophisticated investors.

 

Advantages of DEX

·      Custody-Users of DEX do not need to depend on intermediary and there is not risk of the assets being hacked.

·      Preventing market manipulation-Due to peer-to-peer exchange of cryptocurrencies, there is no manipulation as there is no intermediary involved.

·      Less censorship-DEX do not require customers to fill out KYC forms, offering privacy and anonymity to the users.

Disadvantages of DEX

·      Complexity-Users of DEX must remember the keys and passwords to their crypto wallets or their assets are lost forever and cannot be recovered.

·      Lack of fiat payments-DEX are best for investors looking to switch from one digital asset to another and not well suited for someone looking to buy or sell digital assets with the fiat currency.

·      Liquidity struggles-Some 99% of the crypto transactions are facilitated by centralized exchanges, which suggest that they are accountable for the majority of the trading volume. Due to the lack of volume, DEX often lack liquidity and it can be difficult to find buyers and sellers when the trading volumes are low.

 

Some of the top CEX - Binance, Coinbase Exchange, Kraken, KuCoin, Binance.US, Bitfinex, Gemini, Coincheck, Bitstamp, Bybit

 

Some of the top DEX – Uniswap (v3), dYdX, Curve Finance, Kine Protocol, PancakeSwap (v2), DODO (Ethereum), Sun.io, ApolloX DEX, Uniswap (v2), Perpetual Protocol.