Different types of cryptocurrency exchanges – CEX, DEX and Hybrid
What are the different types of cryptocurrency exchanges?
The different types of cryptocurrency exchanges are centralized, decentralized exchanges, and peer-to-peer exchanges, which have been dominating in the crypto world due to their functional conveniences for different trading preferences. In the past few years, hybrid exchanges have, too, made their mark on the trading market and are still thriving to develop innovative trading opportunities by combining the advantages of the other mainstream cryptocurrency exchanges. In order to understand how each of these trading platforms works, one should first figure out whether they’re prepared to jump into the crypto trading sphere.
The aim of this article is to shine a light on both the good and the bad regarding the use of each type of cryptocurrency exchange and give beginner traders an inside look at what they should keep in mind when entering any crypto trading avenues.
What is a Centralized crypto exchange?
A centralized exchange is an Internet-based platform that enables users to buy and sell cryptocurrencies, but to do so you have to trust the given exchange since it acts as a middleman and is supposed to manage your assets. These types of exchanges are regulated and governed by the creator and/ or owner of the trading platform and also keep track of your private keys.
Everyone who shows interest in trading can easily create an account on a CEX and exchange fiat currencies for crypto coins. Most of these exchanges work with specific trading pairs, which means that the user has to be aware of what they’re able and interested in trading and, therefore, make sure that the exchange they are about to use carries the desired pairings.
Whenever you want to buy or sell a certain amount of cryptocurrency, the CEX is responsible for finding an open order listed by someone else to match your offer. The process is automated and takes milliseconds to be completed.
Pros of CEXs
- The simple interface makes them more user-friendly.
- They’re easier to work with because the platform keeps track of your funds and manages the transactions.
- These types of exchanges provide their users with customer support, which is always a plus when you’re experiencing difficulties with navigating any of the procedures or you have trouble with some of the security guidelines.
- You can easily trade a variety of cryptocurrency coins and tokens with both a crypto and a fiat currency.
- The user can trade between different blockchains.
- CEXs provide additional functions such as crypto earning and staking, integrated NFT marketplaces (like the Binance exchange), crypto loans, Peer-to-peer trading, and more
Cons of CEXs
- KYC information is required, which may be off-putting for those who seek anonymity.
- The trading fees are not always as low as expected, not only due to the higher trading volume but also due to the extra support and convenience the CEXs provide.
- Since centralized exchanges have to manage great amounts of money, this makes them more appealing to hackers, who aim to disturb the work of the platform and take advantage of the assets it holds.
- CEXs also manage your private keys, which may be a drawback for those who want autonomy.
Who should use centralized exchanges?
Based on our experience with both CEX and DEX, if you are a beginner cryptocurrency trader, we recommend opting for a centralized exchange. They are easier to use, and many of them are regulated, which greatly reduces the risk of scams. These types of exchanges will provide you with essential trading opportunities and extra technical conveniences, which otherwise you would have to manage by yourself.
Most popular centralized exchanges
Over the past couple of years, centralized crypto exchanges have expanded their user count and have improved the trading services they provide. Here’s a list of the CEXs that are now thriving on the market:
- Coinbase – one the most eminent CEX in the world, which provides crypto trading services and is known for carrying not only the most popular coins like Bitcoin, Ethereum, Litecoin, and Bitcoin Cash but also a great variety of other promising altcoins.
- Kraken – this exchange has different fiat-to-crypto trading pairs, including not only USD and EUR but some other fiat currencies, too.
- Bittrex – is yet another popular and reputable CEX, which carries Bitcoin, Ethereum, Tether, USD, and a bunch of other trading pairs.
- Binance – not only does it support a variety of altcoins, but it is the best exchange for conducting greater trading volumes because of its low transaction fees.
What is a Decentralized crypto exchange?
A decentralized crypto exchange is a platform that operates without a central authority and allows people to successfully make and take advantage of crypto-to-crypto trading deals. In a decentralized exchange, peer-to-peer trades are being facilitated with the help of a smart contract. This software tool enables the users to take part in an agreement, which would make the transaction of crypto possible. When both parties consent to the requirements of each other, the smart contract will work, but if somebody tries to abuse the deal in their favor, then no transaction will be facilitated.
Another difference between decentralized cryptocurrency exchanges is that they allow only crypto to trades, and the given cryptocurrencies have to be based on the same blockchain.
Unlike CEXs, these exchanges don’t manage your money, and the user is the one who has to take full responsibility when entering into a trade procedure.
Pros of DEXs
- No KYC information should be submitted to the exchange, which is always a plus if you seek privacy.
- You don’t have to trust a central authority. Instead, you should be able to trust the pieces of code that compile the smart contract.
- The transfers are faster because there is no middleman.
- There are low trading fees.
- DEXs are more secure and are harder to regulate.
- Decentralized exchanges don`t store client`s data and funds.
- If you understand code, then you can totally check out how the exchange works, and based on the code sequence, you can see whether the platform is legit or not.
Cons of DEXs
- There’s no customer support, which makes it harder to solve issues, especially when you cannot access your account, no official would help you retrieve it.
- Most DEXs don’t support less popular altcoins and also don`t support as many trading pairs as CEXs
- Decentralized cryptocurrency exchanges offer low liquidity
- In order to use a decentralized exchange, one must have set up a hot wallet of their own. And if you want to become consistent at trading, then keeping your assets in hot storage may not be secure enough.
- The interface isn’t as simple as the one of a CEX.
Who should use decentralized exchanges?
People who prefer to trade on a platform where they can maintain their privacy and want to be in charge of their asset’s private and public keys should try using a decentralized exchange. Since it could be a bit complicated to navigate your actions in such an app, beginners may find the DEX rather off-putting and give up on their trading ambitions earlier. If you have already had some experience in the crypto trading world, you should give the decentralized exchanges a chance because these apps will give you more freedom and security. The most important factor that should affect your exchange platform preferences is the type of trading pairs you want to work with. Therefore, using a decentralized exchange is more suitable for those who already have a decent amount of assets of a certain cryptocurrency and would like to trade and make a profit from it.
Most popular decentralized exchanges
- Uniswap – one of the most popular decentralized crypto exchanges out there. It operates on the Ethereum blockchain and has one of the highest trading volumes.
- PancakeSwap is a popular decentralized exchange. It is built on the Binance Smart Chain.
- SushiSwap – it was created from the Uniswap open-source code and also runs on Ethereum. It supports more than 20 wallets and 14 blockchains.
What is a Hybrid cryptocurrency exchange?
The hybrid cryptocurrency exchange is the result of the combined advantages of both centralized and decentralized exchanges, these innovative trading applications are proposing solutions to a more efficient and hassle-free trading experience. The HEXs provide the security of the DEXs and the convenience and liquidity of the CEXs. These types of cryptocurrency exchanges are considered to be the future of crypto trading because they have managed to integrate the most important features for the users and have challenged them to trust this innovative approach to trading without compromising their experience.
Pros of HEXs
- Fast transaction processing.
- Privacy – no KYC information is required, and you are the one who has to keep track of the private keys.
- The use of smart contracts makes them more secure.
Cons of HEXs
- They’re still under development and are, therefore, not promising the same results as their predecessors.
Who should use hybrid cryptocurrency exchanges?
Since these exchanges are still in the development stage, it is important for people to keep in mind that they might not be able to fulfill all their trading goals on a HEX, especially if they are not familiar with the way any exchange operates. Therefore a hybrid exchange are accessible for both inexperienced and professional traders, but that doesn’t mean that they will have the same troubles or successes at navigating the platform.
Most popular hybrid exchanges
- Qurrex – is the first-ever hybrid exchange, which is mostly known for its high level of security and for providing its services internationally.
- Eidoo – allows you to trade crypto with the help of smart contracts, which are based on the Ethereum blockchain.
What is a Peer-to-Peer Crypto Exchange?
A peer-to-peer (P2P) cryptocurrency exchange allows users to directly buy and sell cryptocurrencies from one another without the need for intermediaries. These platforms facilitate direct negotiations between buyers and sellers and provide security through escrow services, ensuring a safe trading experience.
- Flexible Payment Options: P2P exchanges offer various payment methods, often in local currencies.
- Avoid Government Restrictions: P2P trading can help users circumvent government restrictions on cryptocurrency.
- Enhanced Privacy: P2P exchanges offer greater privacy compared to centralized exchanges (CEXs).
- Negotiation: Buyers and sellers can negotiate prices and terms directly.
- Higher Risk of Fraud: P2P trading can be riskier due to the absence of centralized oversight.
- Slower Transactions: The use of escrow services can make transactions slower.
- Less Liquidity: Smaller P2P exchanges may have limited liquidity.
- Harder for Newcomers: P2P trading might be more challenging for those new to cryptocurrency trading.
Who Should Use It?
P2P exchanges are suitable for:
- Privacy Advocates: Those who prioritize anonymity and privacy in their cryptocurrency transactions.
- Users in Restrictive Regions: Individuals facing government restrictions on cryptocurrency use.
- Experienced Traders: Traders who are comfortable negotiating and conducting due diligence.
- Anonymity Seekers: Those who want to trade directly without middlemen.
- Diehard Bitcoin Enthusiasts: Individuals who prefer P2P for its simplicity and privacy.
Popular Peer-to-Peer cryptocurrency exchanges
Some of the most popular p2p exchanges include OKX, OpenPeer, and KuCoin. Binance also supports a P2P platform.
P2P platforms offer a way to directly trade digital assets and are particularly favored by those valuing privacy flexibility and those seeking alternatives to traditional centralized exchanges.
* The goal of this article is to give basic information on the topic of cryptocurrency exchanges which should not be considered professional financial advice!
Zornitsa is the Editor-in-chief at Coinlabz. She is involved in researching the impact of blockchain technology and the way crypto is transforming peoples’ perceptions of finances.