A cryptocurrency exchange is a web service that enables people to exchange money for digital assets such as Bitcoin, Altcoins, and other cryptocurrencies. Thus, these exchanges act as intermediaries between crypto investors and cryptocurrencies. There are more than 500 cryptocurrencies worldwide which are categorized as Centralized Cryptocurrency Exchanges (CEX), Decentralized Cryptocurrency Exchanges (DEX), and Hybrid Cryptocurrency exchanges. Let us understand how these cryptocurrencies differ and what services they offer.
Centralized Cryptocurrency Exchanges (CEX)
These cryptocurrency exchanges are largely similar to traditional stock market exchanges which allow buyers and sellers to interact. As a result, both parties come together through these centralized exchanges which act as a middleman. This indicates that through these exchanges we allow the centralized institution to handle the money and digital assets.
Further centralized exchanges can be categorized into two categories i.e. CEXs that allow Fiat –Crypto Pairing and Crypto – Crypto Pairing. Some of the popular centralized cryptocurrencies that offer fiat-crypto services are Coinbase, Bittrex, Gemini, Kraken, Robinhood, etc. On the other hand, CEXs that only allow crypto–crypto pairing include Binance, Huobi, KuCoin, Bitfinex, etc. Thus, these exchanges act as the custodian of fiat currency or digital assets to facilitate crypto trading.
Decentralized Cryptocurrency Exchanges (DEX)
This is the form of cryptocurrency exchange that purely aligns with the technological philosophy of cryptocurrency. Being based on blockchain technology cryptocurrencies work on the decentralized approach. DEX does not need any middle-man or intermediaries to hold funds. Instead, it is a marketplace where buyers and sellers interact and process their own transactions through the provided interface.
As a result, DEXs facilitate peer–to–peer trades (P2P). Furthermore, these crypto exchanges are harder to hack making them less vulnerable to fraud. However, DEXs have low volumes and liquidity which makes them less popular among crypto enthusiasts. There are some decentralized cryptocurrencies such as IDEX, Stellar DEX, Waves DEX, Bisq DEX, etc.
Hybrid Cryptocurrency Exchanges (HEX)
Experts believe that the hybrid cryptocurrency exchange model is the next-generation crypto trading marketplace. Users get the features of both centralized and decentralized cryptocurrency exchanges here. Thus, the main objective of the hybrid crypto exchange model is to facilitate better functionalities which broadly include liquidity like CEX and privacy & security like DEX.
The first hybrid cryptocurrency exchange named Qurrex was launched in the year 2018. It was then that experts realized the potential of applying the best practices of traditional exchange to develop a new type of cryptocurrency exchange. As a result, provides the harmonious merge of CEX and DEX. Other popular hybrid cryptocurrency exchanges are Legalos and Eidoo in the Web 3.0 ecosystem.
Which type of Cryptocurrency Exchange is best for you?
All these three crypto exchanges have their own distinct features which make them the choice of different users. So, let’s understand their few functionalities.
Ease of Use: Both centralized and hybrid crypto exchanges are easier to use as they provide better accessibility than decentralized crypto exchanges. Since DEX used a convoluted user interface therefore oftentimes navigation becomes a task. On the other centralized exchanges usually have a well-defined user base that makes both amateurs and new users feel welcomed.
Transaction Speed and Custody of Funds: Centralized crypto exchanges provide the fastest processing speed followed by hybrid exchanges. While the decentralized exchanges lag due to this aspect. Furthermore, centralized crypto exchanges manage the crypto wallet on behalf of the users whereas the decentralized and hybrid exchange model provides users absolute control over their funds.
Security and Privacy Aspects: Since DEX works with decentralized servers. Therefore, they are certainly less vulnerable to hacks. Some of these features can be seen on hybrid crypto exchanges too but not the centralized crypto exchanges. Completing KYC procedures is needed for operating in centralized exchanges whereas DEX needs just an email address.
Cryptocurrency exchanges serve as the main element in the cryptocurrency ecosystem as this is what leads to the creation of a cryptocurrency marketplace. However, based on their preferences different users prefer different exchanges. So, make sure to understand your trading preferences before choosing cryptocurrency exchanges.