All users of cryptocurrencies are somehow connected to exchanges. A cryptocurrency exchange is a place for exchanging cryptocurrencies with each other or with Fiat currencies. Of course, this is the most basic definition for an exchange, and with the advancement of technology as well as the development of distributed ledger technology, we are witnessing the provision of a wide variety of services by exchanges.
There are different categories for exchanges; they can be divided into centralized, decentralized, and hybrid. Of course, some exchanges are known only for offering a specific type of transaction such as derivatives, and they can also be considered in a separate category. As a result, opinions differ in this area.
In this regard, we want to hear Mr. Mohammad Hosseini’s definition of the types of cryptocurrency exchanges and the characteristics of each. His ideas and information as an expert financial market analyst and trader can be very useful for users. Join us to learn more about the types of cryptocurrency exchanges.
How many types of cryptocurrency exchanges are there?
A simple search of online articles reveals that there are completely different categories for different types of cryptocurrency exchanges. Some people consider retailers as a special type of exchange or consider a separate category for derivatives exchanges. I believe that the simplest possible classification for exchanges in this area is to place them in three categories: “Centralized Exchange“, “Decentralized Exchange” and “Hybrid Exchange“.
What is Central Exchange (CEX)?
“Centralized Exchange” (CEX) is a company or financial group that provides a platform for users to exchange cryptocurrencies. In the past, when there was no specific Altcoin, there were only centralized exchanges that allowed the exchange of Fiat currency with Bitcoin. Of course, some centralized exchanges do not offer a Market Place and are more like a retailer; That is, one side of all transactions is the exchange itself, which makes a profit from the difference in the users’ buying and selling prices. Gradually, with the advent of Altcoins, new markets emerged along with different currency pairs for buying and selling.
What we know today as centralized exchanges such as Binance, Coinbase, Kraken, and Houbi include several hundred different markets and this is just a part of their diverse services. Such centralized exchanges have a very high volume of liquidity and offer users a variety of Spot, Futures, Margin, etc. transactions along with other services such as IEO (Initial Exchange Offering), smart chains, lending services, NFT projects, etc.
Using a centralized exchange means entrusting all assets to an intermediary. This is the most important risk that users are willing to take in exchange for using a simple and nice platform. Centralized exchanges keep users’ assets in their own hot wallets, which are highly favored by hackers. In addition to the risk of being hacked, the possibility of exchange scams or the possibility of legislation and various restrictions by governments may also be other problems of using the centralized exchange.
Most centralized exchanges have 24-hour customer services and users do not need to keep their private keys because the exchange manages the accounts.
What is Decentralized Exchange (DEX)?
“Decentralized Exchange” (DEX) was created to solve the long-standing problem of cryptocurrency trading on centralized platforms. Cryptocurrencies have been created to combat government manipulation of Fiat currencies and to promote decentralization, but the most volume of the market is still traded in centralized exchanges, indicating that we are still a long way from the main goal of this field.
Today, thanks to “Smart Contracts” as well as the concept of “Automated Market Maker (AMM)”, it is possible to provide cryptocurrency exchange services on decentralized platforms. Operating in a decentralized exchange does not require authentication and users can trade more freely. Instead of “Order Book“, these platforms use a new concept called “Liquidity Pool“. These pools contain at least one currency pair and, as their name implies, are a place to provide the necessary liquidity for transactions. In each liquidity pool, the capital is provided by users. They can give their assets to the pool in the form of currency pairs and receive a profit from the transaction fees.
For example, Uniswap, Sushiswap, and 1Inch are well-known decentralized exchanges built on the Ethereum network and are growing rapidly. Of course, the transaction volume of decentralized exchanges is still much smaller than that of big exchanges like Binance, but the growth rate of decentralized exchanges cannot be denied, as the volume of locked-in investments in Uniswap and Curve Finance has exceeded $14 billion.
One thing to keep in mind about decentralized exchanges is that they are designed to eliminate intermediaries and prevent the manipulation of centralized organizations, leaving the management of users’ assets to themselves. But working with decentralized platforms is a little harder and requires more knowledge, and there is no user support system or recovery seed, which makes things a little scary.
What is Hybrid Exchange (HEX)?
A “hybrid exchange” (HEX), as its name implies, offers users a combination of centralized and decentralized exchange facilities at the same time. But let’s see if that is possible.
Until now, users had to choose between decentralized and centralized exchanges. If they choose a centralized exchange, they will enjoy the advantages of high liquidity, high speed, ease of use, and support services, but they have given control of all their assets to an intermediary. On the other hand, there are decentralized exchanges in which the control of each person’s assets is in his own hands, but with the slightest mistake, all their capital may be wasted. So we have to be careful that there is a need for more study and training to use decentralized exchanges.
Hybrid exchanges are still very young and many ideas can be implemented in them. One of the most popular models of hybrid exchange works by first registering orders registered in the order book in the blockchain and only when the terms of the transaction are ready, it takes the necessary transaction keys from the user and sends them to the trading pools. All currency pairs in the markets are recorded on the blockchain and the wallet balance is updated after each transaction.
Orders are encrypted and recorded on the blockchain, and the rest of the process is managed out of the chain. As a result, more transparency in the transaction process is achieved and the processing is done with high scalability. Eidoo, Qurrex, and Joyso exchanges are examples of the first hybrid exchanges.
To invest and operate in the cryptocurrency market, we need platforms to buy and exchange cryptocurrencies, and exchanges have been created to meet this need. So do not forget that the exchange is not a place to store cryptocurrencies.
Initially, there was only one cryptocurrency called Bitcoin and one type of exchange called the centralized exchange. Gradually, with the advancement of technology and the emergence of Altcoins, as well as the interest of investors in this field, the number of centralized exchanges increased and decentralized exchanges started operating. Recently, hybrid exchanges have been established to use the advantages of both these two types of exchanges.