What is a crypto exchange?

The purpose of decentralized ledger technology (a.k.a. blockchain technology) is to facilitate a peer-to-peer transfer of value and to support a basket of financial services in a decentralized fashion.
With blockchain-backed financial services, there are no interference in the movement and usage of digital assets.

Definition: What is a crypto exchange?

  • A crypto exchange is a web-based (software) application/ platform designed to facilitate buying and selling including staking of crypto-assets.
  • Crypto exchanges essentially match buyers with the seller.
  • On top of trading services, cryptocurrency platforms also provide a number of useful features, such as price discovery, market analytics, activity trackers, and asset storage.

The transaction charges and level of security vary with the crypto exchange services users opt for. With crypto exchange, users get the autonomy to pick a digital asset of their choice – one that suits their short-term and long-term requirements – one that fits their price range and performance expectation.

Cryptocurrency exchange working principles:

Cryptocurrency exchanges allow both institutional and individual users to create an account and instantly trade a wide array of cryptocurrencies such as bitcoin BTC, ether ETH, Litecoin LTC, Polkadot DOT, and dogecoin DOGE over the exchange.

Cryptocurrency exchange enable users to buy crypto-asset using fiat currency such as USD, INR, and EURO as well as swap crypto tokens for crypto tokens literally from anywhere – only with one click. Additionally, these exchanges allow users to swap their crypto holding from one cryptocurrency to another.

Usually, well-established crypto exchanges offer access to a wide range of cryptocurrencies. Still, it is always better for users to check the list of cryptocurrencies the respective crypto exchange offers.

There are some well-known crypto exchange platforms that solely provide you with fiat to crypto features. On the other hand, there are wider range of smart-contract-powered and centralized crypto exchanges that enable crypto-to-crypto trades.

Crypto exchange also allows investors and traders to liquidate their crypto holdings – turn their cryptocurrencies into fiat currencies. The fiat currencies are stored in the user’s wallet allowing them to execute future purchases and conduct trades. Investors and traders can also withdraw cash after selling their holdings on a cryptocurrency exchange.

The stack of services offered by the crypto exchange will vary based on the type of application investors use. There are crypto exchanges that allow you to store crypto-assets in a different, more private, more secure wallet. But not all exchanges provide you the functionality to store crypto-assets off-platform.

Difference between Cryptocurrency brokers and exchange:

Cryptocurrency brokers is a firm or individual entity who acts as a centralized intermediary for individuals who want to exchange fiat currency for crypto-services. Crypto-brokers usually charges premium for their services.

Unlike crypto-blockers, Cryptocurrency exchange are independent platforms that act as intermediaries between the decentralized market and the investor or trader. They allow users to trade digital assets as well as buy and sell holdings in real time with rest of the community.

Investors holding huge funds and planning to execute large buy or sell orders usually opt for over-the-counter exchange over brokers to eliminate risks. Exchanges safeguard investors from slippage – which usually takes place when trading on a crypto exchange.

Upsides of crypto exchange:

  • Most user experience begins on a crypto exchange – as it provides a convenient way to purchase cryptocurrency.
  • Cryptocurrency exchange provides wallets that allow users to promptly transact, send, store, and receive crypto assets across blockchain networks.
  • Crypto exchange offers an easy-to-use interface for users.
  • Some of the renowned cryptocurrency exchanges are compliant and allow investors to trade within the regulatory framework.
  • Numerous crypto exchanges offer investors and traders tax support, making tax management easier for individuals and institutions.

Crypto exchange categories:

Centralized Cryptocurrency Exchange

The centralized cryptocurrency exchanges also referred to as CEX, are designed for both institutional and retail users who are new to the blockchain ecosystem and do not hold an intimate knowledge of the crypto space.

A centralized crypto exchange enables investors to purchase and trade digital crypto assets using both fiat government-backed currency as well as other cryptocurrencies. Plus, it allows them to access their holdings on demand via custodial wallets.

In simple terms, a centralized cryptocurrency exchange can be considered a stock exchange for digital cryptographic assets.

With CEX, investors can buy and sell crypto assets at prevailing rates.

Workings of CEXs

A centralized crypto exchange is actively supervised and administered by an authorized exchange operator. The third-party exchange operator designs the entire customer journey in order to achieve frictionless in-app trading experience.

The payment processing is relatively easy and quick with a centralized exchange since most CEXs support easy integration with a varied range of bank account, credit card, and debit card service providers.

The centralized exchange operators actively manage the liquidity aspect of the exchange.

Usually, a fixed cost and exchange operator fees are attached to every crypto asset purchased via CEX or traded over the centralized crypto exchange.

Generally, CEX operators hold the authority to decide which crypto-assets get listed. Such responsible measures from CEX operators offer trader peace of mind – they require to trade efficiently. The unscrupulous crypto tokens and project usually gets excluded in the process.

Decentralized Cryptocurrency Exchange

The decentralized cryptocurrency exchanges also referred to as DEX, are designed for both tech-savvy individuals, firms, and retail users who understand how decentralized financial instruments operates on blockchain technology.

A decentralized crypto exchange operates without any third-party oversight or human interference. Usually, decentralized cryptocurrency exchanges are open-sourced – which means anyone can audit the code behind the application. DEX enables peer-to-peer trading across multiple blockchain networks.

DEXs are designed to be trust less. These decentralized applications help preserve personal data. With decentralized crypto exchange, users don’t need to set up an on-exchange account, opt for identity verification, and provide personal information.

Workings of DEXs

Decentralized crypto exchanges autonomously operate on top of smart contracts. Smart contracts are self-executing blocks of codes deployed on a blockchain network. These smart contracts are designed to provide more privacy and security and incur less transaction cost.

A decentralized cryptocurrency exchanges are preferred by sophisticated, tech-savvy investors.

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