Types of Crypto Exchanges
Typically, conventional wisdom considers two types of crypto exchanges: centralized and decentralized.
This guide is focused exclusively on centralized crypto exchanges. These types have distinct features making them advantageous or disadvantageous depending on the circumstance.
Centralized Crypto Exchanges
Centralized cryptocurrency exchanges (CEX / CEXes) are typical companies based somewhere in the world. They are providing their service as a business and are abstracting most of the technical requirements for users, making it easy to get started with crypto and simple to trade.
Most centralized exchanges can accept fiat currency via debit card or bank transfer (but not all of them), making them one of the most important bridges between fiat and crypto economies. Globally, most crypto trading happens on centralized crypto exchanges.
Centralized crypto exchanges follow international financial laws, mandates, and regulations and provide data to authorities when presented with a court order. Since they are compliant with regulations, crypto exchanges gather Know Your Customer (KYC) data from each user, which is a similar experience to opening a bank account.
One of the essential concerns regarding centralized exchanges is cybersecurity threats where your data or your cryptocurrency may be compromised. It's advisable to avoid keeping substantial amounts of crypto on your crypto exchange and keep it safe on a hardware or cold wallet. Today, most crypto exchanges have very high cyber security standards and insurance policies to cover potential breaches.
Decentralized Crypto Exchanges
Every exchange on this list is a centralized exchange. Centralized exchanges operate just like the classic stock market exchanges. They represent an institution acting as both a market maker and an intermediary for trades.
Centralized crypto exchanges have total custody of all funds on their platform. There is a saying in crypto: "not your keys, not your crypto." When you send crypto to an exchange, you trust them with your money. Trust is not a problem for many, but this is anathema to the very crypto ethos for many others.
Decentralized Exchanges, or DEXs, are a way for users to trade their cryptocurrency without having a counterparty to their trade. The way it works through Automated Market Makers (AMMs). These AMMs contain liquidity pools that include various coin pairings. A mathematical formula determines the price ratio between the two coins in the pool. People can buy tokens from these pools without having a centralized body or counterparty involved in the trade. Users trade with the pool itself, which adjusts the price depending on how much each coin is in it.
DEXs are a brand new way of making markets that have been made possible by crypto-economic primitives inherent in the blockchain. In the future of Web 3.0, DEXs stand a great chance to become the dominant way of trading once users and market participants familiarize themselves with their function.
An additional benefit to current-day decentralized crypto exchanges is that they do not require any KYC verification since they are fully decentralized. It is unclear whether this continues to be the trend, as the initiative for decentralized identity solutions (and controversially, a decentralized credit score system) is driving web3 to a point where identity verification may become the norm, even for decentralized systems.