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Cryptocurrencies have been the talk of the financial town for quite some time now. When Satoshi Nakamoto released the white paper to the blockchain-based Bitcoin a brand new industry of digital tender was born. When it comes to money – in any form – two of the questions immediately raised are “how can I get it? and “where can I spend it?”
There are two answers to each of those questions:
How can I get cryptocurrency?
The short answer is that you could mine it – if it is mineable like Bitcoin – or you could buy it from a cryptocurrency exchange.
Where can I spend cryptocurrency?
You can use your cryptocurrency tokens to purchase from service and product providers who accept the digital currency. You can also “spend” your tokens at a cryptocurrency exchange to trade it for local fiat currency or to change it to another token. For example, you could trade your Bitcoin for Ethereum at an exchange which offers both currencies.
The common answer to both of these questions relates to the function of a crypto exchange
What is a cryptocurrency exchange?
A cryptocurrency exchange is similar to a stock exchange, but with a focus on cryptocurrency tokens rather than stock trades. Essentially, a crypto exchange offers a platform whereby customers looking to buy and sell cryptocurrency assets can exchange the digital tokens in values based on current market prices.
Usually, exchange platforms allow transactions or trades to take place in forms such as:
- Local fiat-to-cryptocurrency transactions, and
- Cryptocurrency-to-cryptocurrency transactions.
Some cryptocurrency exchanges offer a platform which is focused on ease for the customer, some hope to offer competitive pricing and others want to provide a platform which professional cryptocurrency traders can use.
What are the types of cryptocurrency exchanges?
There are three different types of cryptocurrency exchanges:
- Centralised exchanges (CEX)
- Decentralised exchanges (DEX)
- Hybrids
What is a centralised cryptocurrency exchange (CEX)?
Known as a traditional cryptocurrency exchange, this is a cryptocurrency platform governed by a company of central organisation which offers cryptocurrency trades from either fiat-to-cryptocurrency or crypto-to-crypto tender.
What is a decentralised cryptocurrency exchange?
A decentralized exchange – also referred to as a DEX – acts as an alternative to a traditional, centralized exchange. This type of cryptocurrency platform does not depend on a company or a service to control the assets of a customer. Instead, the trades or transactions are controlled by an automated process without any central presence. These trades are considered peer-to-peer or customer-to-customer.
Using blockchain technology, the decentralized exchanges are built to ensure there is a secure way for the transfer of cryptocurrencies without any central figure. Essentially the platform acts as a service which connects trade orders with one another to serve customers looking to exchange tokens. Most decentralised exchanges operate using Ethereum’s blockchain in order to conduct services through the use of smart contracts.
Decentralized vs decentralized exchanges:
Both versions of the cryptocurrency platform have pros and cons within their method of offering cryptocurrency trading
Centralized exchanges:
- Offers high trade volumes compared to DEX
- Offers high liquidity
- Allows fiat-to-cryptocurrency trades
- High functionality
- Is more vulnerable to hacks compared to DEX
- Under governmental regulations (can be shut down)
- Centrally governed
Decentralized exchanges:
- Offers lower trade volumes compared to CEX
- Does not have high liquidity
- Currently only offers crypto-to-crypto trades
- Limited functionality
- Offers high security from hacks owing to distributed nodes
- The government cannot shut down owing to distributed global nodes
- No central company
What is a hybrid cryptocurrency exchange?
A hybrid cryptocurrency exchange is a combination – as the name implies – of both centralized and decentralized exchanges. Taking the best from platform concepts, a hybrid exchange offers the trustless nature combined with the low latency and fast transaction speeds of centralized platforms.
Like decentralised exchanges, a hybrid makes use of smart contracts to ensure that there is no central figure imposing on the integrity of the trade. Basically, this reduces security risks and puts the safety of a customer’s assets onto a blockchain rather than relying on a company.
What are the top cryptocurrency exchanges?
At the time of writing, the biggest cryptocurrency exchanges in terms of the market cap according to CoinMarketCap are as follows:
- Binance
- Bit-Z
- HitBTC
What is Binance?
Binance is considered the largest cryptocurrency exchange in the world since 2018. The centralized exchange is founded by cryptocurrency figure Changpeng “CZ” Zhao and has its headquarters in cryptocurrency hub Malta – having moved from Hong Kong to the European innovation capital. The platform offers over 100 cryptocurrency tokens and boasts low trading fees.
In February 2019, Binance launched its test network (testnet) for its decentralized exchange. Traders can now exchange tokens using the testnet and can create a wallet through the platform. Of the new decentralized exchange, CZ wrote:
“Binance DEX is a decentralized exchange with a decentralized network of nodes, where you hold your own private keys and manage your own wallet. With Binance DEX, we provide a different balance of security, freedom, and ease-of-use, where you take more responsibility and are in more control of your assets.”