The different types of cryptocurrency exchanges
If you’ve ever dealt with crypto, you know how confusing it might be sometimes. Buying crypto, spending it, trading, it can all be very complicated, but the first and most essential question that always gets asked is “What crypto exchange should I use?” There are many exchanges, more than 200 currently, and that number is growing as each day passes. All these crypto exchanges are very different at their core; some of them are regulatory-compliant, while some of them are decentralized and can’t be regulated, thus operating autonomously. In this article, we’ll divide all crypto exchanges into five classes and see what the differences are between them so you can better understand what best suits your needs.
Meaning of cryptocurrency exchanges
Cryptocurrency exchanges are online platforms in which you can exchange one kind of digital asset for another based on the market value of the given assets. The most popular exchanges are currently Binance and GDAX.
Cryptocurrency exchanges provide liquidity for you to trade your cryptocurrency for USD, stablecoins, or other altcoins. The market price of a cryptocurrency is determined by buying and sell orders on the exchange. You could also use a crypto brokerage, which only slightly differs from a cryptocurrency exchange. Crypto brokerages set the price of crypto assets based on the market price of the asset, but the price of crypto on exchanges is directly determined by investors’ buy and sell orders.
The different types of exchanges
These five types of exchanges are:
1. Centralized – more liquidity, easy to use.
2. Decentralized – all operations are settled on the blockchain, all coins are held by their owners.
3. Broker – a legal centralized exchange that is fully compliant with its local regulations.
5. Hybrid – a mix, combining the security of decentralized networks with the user-friendliness of centralized exchanges.
As you can probably see, the distinction is made by two factors: compliance with regulations (or no compliance at all) and the entity that controls funds during the trading process. We’ll analyze each type of exchange and provide some examples to make this easier to understand.
These are the most common, as the largest crypto exchanges in the world belong to this type. Binance, Bitfinex, Kraken – all of these platforms are centralized. It should be pretty clear as to what distinguishes them – each one of them has a centralized operator, which is responsible for its security, upgrades, functionality, and has representatives to handle public relations on their behalf. It also runs on centralized software; it only has one central server that runs all operations.
- Centralized exchanges have the biggest liquidity and volume among all types. For example, each day on Binance there are more than $450 million in trading volume. So if you want to trade big, at least operating with a few hundreds of thousands of dollars, you will find a lot of buyers and sellers there.
- Some centralized exchanges, such as Bitfinex or Kraken, can receive deposits in fiat currency. There’s a support team that can help you if something goes wrong – for example, if you sent your BCH to a BTC wallet of the exchange, they can recover them if they have private keys from both wallets.
- There is a large variety of cryptocurrencies that are traded there. Since the framework is centralized, there’s no actual exchange of currencies between users, only the transfer of ownership in the database – if user a sells 1 BTC to user B, instead of moving coins, the balances of both users get updated in the database of the exchange, while the real coins sit still in the exchange’s wallet. So any currencies, otherwise incompatible, can be exchanged between one another. But this also has its downsides.
- All coins are stored in the wallets of the crypto exchanges; users have no real control over their funds. That’s why they sometimes get hacked and funds get lost. In case of hacking and the loss of funds, the users could be refunded – it depends on the severity of the hack.
- Slow withdrawal times, sometimes it may take a week to complete.
- Your open order can be closed without any notification. Bittrex has a policy of closing all orders older than 27 days.
These exchanges are opposite to their centralized counterpart. There is no single entity controlling them, the whole exchange is a set of smart contracts that allow for the trustless exchange of tokens. The most popular exchanges are Etherdelta and IDEX, which work on Ethereum.
- Users have full control over their funds. The exchange serves only as an order book to connect two users, buyer, and seller, and help them trade two tokens via a smart contract.
- All opened trades can’t be closed by anybody except for the user. It’s forever scripted into the contract.
- There are a lot of unpopular tokens that aren’t listed on large centralized exchanges that are available for trading.
- It can’t be hacked, simply because it’s protected by the security of the blockchain. However, every user is responsible for their security; keeping their private keys safe, and sending their coins only to trust contacts and addresses.
- Very low liquidity. The daily trading volume of IDEX is slightly over $1 million, and the daily volume of Etherdelta is only $39,000. Thus you won’t be able to sell large amounts of tokens there – a trader with a balance worth $10,000 would be uncomfortable there based on the daily volume of the exchange.
- Every action, even placing or canceling the order, requires paying a fee (in the case of Etherdelta, it’s a regular gas fee for the network, which is 0.21 USD at the time of writing), because it’s placed directly on the blockchain.
- Another downside is the capability to trade only inside one particular blockchain. Ether exchanges allow for the trading of ERC20 tokens, so it’s time to forget about BTC pairs if you decide to trade there.
- And the fourth con that isn’t very good is the irreversibility of all actions. If you did something wrong, you lose your funds forever, because it’s a smart contract. There is no way to cancel a transaction that has already been sent. For example, there is $1.1 million worth of EOS ERC20 tokens forever locked in Etherdelta after their conversion to EOS blockchain – their owners can’t retrieve them, because the Ethereum contract issuing these tokens ceased to exist.
- Also, remember that there no fiat here. However, you can use Ethereum-based stablecoins.
Crypto broker exchanges
There is only one major crypto exchange that can be considered a broker at this time, and it’s Coinbase. It can be counted also as a centralized one, but there is one important nuance: it’s fully compliant with all regulations in the US and any other country where it operates; no other centralized exchange has that kind of license. That’s why any US citizen can use it without restriction.
- Fully regulated. There’s a higher chance that user funds won’t disappear one day. Obtaining a license is a complicated process, the top managers of a brokerage are also known to regulators, so there’s no way they can pull off fraudulent activities and disappear.
- Great security. Coin base even offers custody services to institutions. One of the best security solutions on the market, all funds are stored in cold wallets.
- A user-friendly mobile application that is easy to use, as well as the exchange interface – there are a few wallets for each asset, and two buttons for buying and selling.
- It’s still centralized, so you don’t control your coins. Most of the cons of centralized exchanges apply here as well.
- Sends all of the information about your funds to the tax inspector. You are required to pay taxes for all your gains.
- Doesn’t operate in many countries, including France, Japan, Russia, and South Korea.
- Only eight assets are available for trading – BTC, BCH, ETH, ETC, LTC, USDC, ZRX, BAT.
There are a few popular types of this exchange already – Shape shift, Godex, Changelly. This type of platform is a simple way to exchange any cryptocurrency for another cryptocurrency. How is it different from the other exchanges? You don’t trade here against another trader, you simply trade with the service itself. It has a large pool of cryptocurrencies that allows for instant exchanges, fast and simple. You send one coin and receive another coin to a specified address. The user is charged not only a miner’s fee, but the exchange rate is higher than on other exchanges.
- It is fast and instant. No need to wait for an order to be filled. No need to get accustomed to the trading interfaces of various exchanges. Just choose a currency and exchange it, no need to even wait for a withdrawal.
- It doesn’t need to hold the funds of its users.
- Has a lot of coins and tokens – Shape shift offers more than fifty various cryptocurrencies and Godex has more than 102 cryptocurrencies.
- The price is a lot higher than on regular crypto exchanges. Shape shift exchanges its coins and tokens according to the current fixed market prices, plus their surplus, to make a profit.
- Sometimes certain pairs are not available because the exchange runs out of coins, and users must wait until these coins get replenished.
- A small liquidity pool of the exchange is for small retail buyers, not for large amounts, so you can’t exchange millions worth of assets here.
Hybrid crypto exchange
By “hybrid” we mean the combination of the security of decentralized exchanges and the usability of centralized ones, and this can be achieved in many ways. For example, an exchange can match orders of its user’s off-chain and update their balances right after they submit the transaction to the blockchain. Or it can provide a high-quality security system that matches the security of decentralized exchanges, so user funds could be as safe as they would be in their wallet. Among these exchanges, we can name EXMO, CEX, and Bit stamp. EXMO was founded five years ago and it hasn’t ever been hacked. It provides high security to its users and is convenient to use. CEX is an exchange by a well-established cloud mining provider that concentrates on its users’ security. For those who want to try trading on a hybrid exchange, Bit stamp has a very high volume and liquidity.
- High security. All funds are stored in cold storage, protecting users’ funds even in the hypothetical situation that the exchange gets hacked.
- Two-Factor Authentication is available for all users. This feature ensures the fund’s protection by adding another authorization linked with the user’s mobile phone.
- These types of exchanges are never easily hacked. In five years, only Bit stamp was hacked via social engineering with its employees, and customers were immediately refunded. EXMO and CEX have never been hacked.
- Available fiat deposits. Most hybrid exchanges accept wire transfers from many countries. EXMO supports SWIFT and SEPA transfers.
- Some of these exchanges offer many coins and token pairs for trading, there are 101 various currencies on EXMO.
- Protection against DDOS attacks. The use of special Cloud flare software and high-load servers allows it to stay online all the time.
- The volume is somewhere between centralized and decentralized exchanges: $25 million in the last 24 hours on EXMO, $12 million on CEX. That’s not enough for a large crypto whale, but there’s sufficient liquidity for whales operating with hundreds of thousands of dollars.
Frequently Asked Questions on the type of exchange
What is the difference between a crypto exchange and a brokerage?
Crypto exchanges and brokerages are similar. Crypto brokerages act as an intermediary to set the price of crypto assets based on the market price, while crypto exchanges determine the price of cryptocurrencies directly through investors’ market orders.
Are all the top cryptocurrency exchanges based in the United States?
Many top crypto exchanges are based in the United States. For example, Coin base and Gemini are based in the United States but also offer services in a variety of other countries. There are also exchanges outside the U.S. Binance is headquartered in Malta because it has less strict cryptocurrency regulations than most other countries.
A crypto exchange is a platform for buying and selling cryptocurrencies. In addition to trading services, crypto exchanges also offer price discovery through trading activity, as well as storage for crypto. Before crypto exchanges, people were only able to acquire crypto through mining or by organizing transactions in various online and offline forums. Today, there are hundreds of crypto exchanges offering an array of digital assets and varying levels of security and associated fees. It’s up to you to find the exchange and digital assets that suit your particular needs, price range, and security expectations.
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