When one hears the term crypto exchange, the immediate analogy is that of a stock exchange. A crypto exchange is where one can exchange digital currency for other coins or fiat money like dollars or pounds.
Without the intervention of an exchange, users would need to go through the hassle of locating someone who wants the item they possess, then agreeing on an exchange rate with that person, and then transferring the currency into each other's wallets directly. Exchanges simply make everything simpler for all concerned. Selecting the proper exchange for your purposes might be a little confusing since there are literally hundreds of various options to choose from. So, how do you make a selection as to which one to utilize?
Types of Exchanges
There exist three variations of crypto exchanges: Centralized (CEX), Decentralized (DEX), and Hybrid.
CENTRALIZED EXCHANGES
Let us begin with Centralized Exchanges. These are typically simpler to use. They have more extensive usage, they get better customer support readily available, and even have insurance in case there is a platform breakdown.
Centralized exchanges also use KYC (know your customer) procedures in an effort to be in compliance with AML (anti-money laundering) laws. If you ever were required to open a bank account this will sound familiar because of the questions being asked.
Something to note is that Centralized Exchanges are more susceptible to being hacked.
DECENTRALIZED EXCHANGES
Decentralized exchanges are closer in spirit to Bitcoin in that they have no central point of control. The servers are dispersed around the globe, so if one computer is attacked, it does not bring down the entire exchange. This is sufficient to make some prefer decentralized over centralized.
The registration process is also not as strict as with centralized exchanges, so if the idea of sharing your personal info doesn't sit well with you, decentralized will suit you fine
This platform isn't without its own limitations, though. Though more secure, they have lower trading volumes and no customer support like centralized exchanges.
HYBRID EXCHANGES
Hybrid exchanges are the new kids on the block. Hybrid platforms aim to offer the best of both worlds. More functionality, and more security, are the objectives here. Hybrid Exchanges are only newly established and as such, their future is unknown. High fees, lack of assets, and low scalability are the obstacles to the success of these.
As is the case with your brokerage account, you will see that crypto exchanges assess a series of fees. There are two varieties:
A. Exchange fees - They're really service fees and they're how the exchange profits:
a) Trading fees, or maker/trader fees, are assessed when executing a transaction.
b) Deposit fees are assessed when putting money in your account.
c) Withdrawal fees are applied when you withdraw funds from your account, whether it is in the form of normal currency or crypto.
d) Account fees are applied on a regular basis in order to maintain the account open, normally monthly.
B. Network fees - They are paid to crypto miners. This is a cost that is borne by most centralized exchanges but also provide an option for users to pay extra to make transactions faster. On decentralized exchanges, users bear this cost.
When thinking of a crypto exchange, the first analogy to come to mind is a stock exchange. A crypto exchange is a place where users can trade digital currency for other coins or traditional currencies such as dollars or pounds.
Without the use of an exchange, users would have to go to the trouble of finding someone interested in what they have, then settling on an exchange rate with that individual, and then sending the currency directly to each other's wallets. Exchanges just make everything easier for all parties involved. Choosing the right exchange for your needs could be a bit tricky as there are literally hundreds of different options available. So, how do you go about deciding which to use?
There are three types of crypto exchanges: Centralized (CEX), Decentralized (DEX), and Hybrid.
Let's start with Centralized Exchanges. These are usually more user-friendly. Their use is more widespread, they tend to have more readily available customer support and even have insurance in the event of a platform failure.
Centralized exchanges also employ KYC (know your customer) practices in order to comply with AML (anti-money laundering) regulations. If you have ever opened a bank account this process will feel familiar due to the types of questions asked.
One thing to keep in mind is that Centralized Exchanges are more vulnerable to hackers.
Decentralized exchanges are more akin to the spirit of Bitcoin in that they have no central point of control. The servers are spread across the world, meaning that one computer being attacked does not compromise the entire exchange. This is enough to incentivize some to prefer decentralized vs centralized.
The registration process is also less rigid than with centralized exchanges, so if sharing your personal information makes you uneasy, decentralized may be best for you
This platform isn't without its own drawbacks, however. While more secure, they tend to have a lower trading volume and lack the customer support of centralized exchanges.
Hybrid exchanges are the new kids on the block. These platforms look to provide the best of both worlds. Greater functionality, as well as security, are the aim here. Hybrid Exchanges are still relatively new and as such, their future is uncertain. High costs, limited assets, and limited scalability are the hurdles to overcome for these.
Just like with your brokerage account, you will notice that crypto exchanges charge a series of fees. These come in two flavors:
A. Exchange fees - These are essentially service fees and they are how the exchange makes money:
a) Trading fees, also called maker/trader fees, are charged when engaging in a transaction.
b) Deposit fees are charged when addi
ng money to your account.
c) Withdrawal fees are charged when you take money out of your account, be it as regular currency or crypto.
d) Account fees are charged on an ongoing basis in order to keep the account open, usually monthly.
B. Network fees - These get paid to crypto miners. Many centralized exchanges incur this cost but also allow users to pay more in order to speed up transactions. On decentralized exchanges, users are the ones to shoulder this cost.
