What Are the Three Main Types of Crypto Exchanges?
When it comes to trading cryptocurrencies, there are three main forms of exchange—centralized, decentralized, and hybrid. We cover the details you need to know.
Jul 11 2022 | ArticleWhat Are the Three Main Types of Crypto Exchanges?
The meteoric rise of cryptocurrencies has attracted an avalanche of investors looking to buy into the cryptocurrency boom. Just like the stock exchanges of the financial industry, crypto exchanges offer users a platform to buy, sell, and convert cryptocurrencies. Without cryptocurrency exchanges, it would be nigh impossible for investors to enter into cryptocurrency, and as new traders and investors make their way into crypto, it is important to understand the differences between the types of crypto exchanges.
#The Three Main Types of Crypto Exchanges
Once you're more familiar with the world of crypto, you may want to learn how to make a crypto exchange site. Until then, it’s helpful to familiarize yourself with the three main forms of exchange—centralized, decentralized, and hybrid.
#Centralized Exchanges
Centralized exchanges (CEX) are the most common type of crypto exchange and are very similar to traditional stock exchanges. They are referred to as centralized exchanges because a central entity governs them. These exchanges usually offer crypto-to-crypto trading and use funds via your bank account or credit card to trade cryptocurrencies. However, some CEXs may offer fiat-crypto pairings.
The centralized entity acts as the trusted middleman between buyers and sellers. When a buy order is placed on these exchanges, they find a seller to match your buy. Likewise, if you’re selling, the exchange finds you a buyer.
Pros of Centralized Exchanges
- Centralized exchanges are the most liquid crypto exchanges and account for most of the trading volume of the crypto industry.
- They are often regulated and users are protected from scandals.
- Centralized exchanges are often regarded as the fastest exchanges, and their interfaces are easy to navigate.
- They allow fiat to cryptocurrency trades.
- Centralized exchanges offer better customer support.
Cons of Centralized Exchanges
- Centralized exchanges hold the private keys of their users. Thus, investors are not given complete custody of their assets.
- In a bid to remain regulatory compliant, centralized exchanges provide fewer options, especially for traders looking to explore new crypto/crypto pairs.
Binance, Coinbase, Huobi, and Kraken are among the most popular centralized exchanges.
#Decentralized Exchanges
Decentralized exchanges, commonly known as DEXs, were created to solve some of the flaws inherent in CEXs. Decentralized exchanges remain true to the initial philosophy behind the cryptocurrency industry. There is no reigning central authority, and DEXs do not rely on a middleman to hold your funds. Decentralized exchanges are created for buyers and sellers to come together and transact directly—what is known as peer-to-peer trades (P2P). It's possible to host your own DEX through the help of white-label exchange solutions.
Pros of Decentralized Exchanges
- There is no central ownership, mirroring a major feature of cryptocurrency.
- DEXs offer high security from hacks because of their distributed node system.
- Users are given control of their private keys and full custody of their crypto assets.
- DEXs offer users more listings of crypto-crypto pairs.
Cons of Decentralized Exchanges
- They are relatively slower and less functional than CEXs.
- Users cannot create more complex orders that rely on assistance from a third party, such as stop-loss.
Uniswap, Compound, Sushiswap, and Pancakeswap are among the most popular decentralized exchanges.
#Hybrid Cryptocurrency Exchanges
Hybrid exchanges are a new generation of crypto exchanges that merge the best of centralized and decentralized exchanges. They combine the fast transaction speed you can find on CEXs with the security assurance of private keys offered by DEXs. The most popular hybrid exchanges are Nash and Qurrex.
#In Summary
Although the pros and cons of these types of exchanges are different, they offer different ways for users to interact with cryptocurrency, and each fills an important role. These features should help you choose the best exchange to buy, sell, or swap cryptocurrencies.
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