The number of cryptocurrencies is increasing day by day and investors are chasing profits with these new assets. So, how exactly do crypto exchanges work, which facilitate your crypto investment, offer you buying and selling opportunities, make trading with various order types less risky, and provide secure solutions for managing your assets? What are the key features of crypto exchanges compared to traditional exchange platforms? What do decentralized exchanges mean and is every crypto exchange decentralized?
Today we have prepared a very comprehensive crypto exchange file from A to Z for you. We are sure that you will have discovered all the details when you browse the content!
- Cryptocurrency exchanges can be thought of as investment tools that allow users to buy and sell listed currencies.
- Exchange platforms can be centralized or decentralized, depending on their working structures, whether they hold custody of assets or the protocols they offer to perform transactions.
- While performing transactions on CEXs, the values of assets are determined according to the supply-demand balance in the order book. In order for the transaction order you created to be executed, another corresponding order must be placed by another user.
- While trading on DEXs, order books can be kept on-chain or off-chain. In addition, some platforms (AMMs) perform transaction protocols through smart contracts that manage liquidity pools, completely independent of the order book.
- While choosing the best crypto exchange for you, it is logical to review the number of coins listed, transaction fees, security measurements, liquidity, accessibility, and crypto wallet solutions.
- While CEXs provide advantages to users, especially in terms of liquidity, transaction speed, and educational content, DEXs are preferred due to the large number of coins offered, very high APY rates, and ecosystems that offer extra privacy.
The Definition of Crypto Exchanges: Looking Closer
Cryptocurrency exchanges can be thought of as investment tools that allow users to buy and sell listed currencies. These platforms, which are used online and perform transaction orders quickly thanks to the transaction volume they provide, enable you to buy different cryptocurrencies using fiat currencies or other altcoins.
Cryptocurrency exchanges are generally preferred over traditional ones because they offer a large number of asset options, low transaction fees, and high transaction volumes. With their advanced security systems and the wallet options that some offer, these platforms can have a number of advantages and disadvantages.
How Do Cryptocurrency Exchanges Work?
See how crypto exchanges process your order briefly.
The Working Logic of Centralized Exchanges
- A cryptocurrency exchange works quite similarly to traditional stock exchange platforms. These platforms enable the transfer to take place by matching the orders of the buyers and sellers of any cryptocurrency. Users can specify how much cryptocurrency they will buy at what point by creating a buy order. Creating an order means authorizing the exchange platform to buy / sell the number of coins specified in that order. The exchange, which sticks to the determined limit order, chooses the price offer that corresponds to the order and completes the transaction.
- All orders created in real-time while the transactions are carried out are collected in the order book. This order book, which can be accessed by everyone, is the main factor that determines the prices of assets in the relevant exchange.
- When you buy an asset on a CEX platform, the platform buys it for you. The custody of your assets belongs to the platform until you want to withdraw your money in real terms. Prestijki CEXs share corporate wallet IDs, and cold wallet IDs with the public and make use of various insurance policies to make sure your money is safe.
- CEXs offer custodial wallets on their platform and require you to use them.
- CEXs are home to thousands of traders who trade multiple cryptocurrencies at the same time. It is important that the trading volume on the platform is high so that the orders you create can be processed as soon as possible and at the value you specify. Because the higher the trading volume, the higher the probability that there will be another trader who wants to buy the cryptocurrency you want to sell at the value you set.
The Working Logic of Centralized Exchanges
DEXs also take place in the buying and selling process. This can happen in two ways.
- P2P DEXs: Participants can perform lending, borrowing, buying, and selling transactions directly with each other within the peer-to-peer network. Agreements to be made between peers are protected by smart contracts. Peers can easily carry out commercial transactions if their offers are compatible with each other. The powerful smart contract used on the platform ensures that the transaction is canceled if all requirements are not met. In this way, the rights of each user are protected.
- Peer-to-smart contract logic: Participants can also trade against an asset called a pool or liquidity pool. In this case, the prices of the assets are determined not by the peers or the trade balance in the order book, but by the mathematical formula specified in the smart contract beforehand. While trading, users receive a price quote from the platform according to the change that their transaction will create in the liquidity pool. If a user wants to make a UNI – ETH transaction, the UNI he sells is transferred to the relevant pool, and the ETH he buys goes from the relevant pool to the user’s wallet. The main purpose here is to build a price-determining structure other than the order book and to offer the same price to all users at the same time. Providers who lock their money in the liquidity pool in such platforms obtain yields by using these funds in transactions within the platform.
DEXs usually require you to pair your third-party wallet with the platform. For example, when you enter Uniswap, click on the Metamask sign in the upper right corner and say “Connect”. With a single action, your wallet becomes accessible via Uniswap.
What to Consider When Picking a Cryptocurrency Exchange?
Before we dive into the two popular types of cryptocurrency exchanges, we wanted to talk about what you should consider in the process of choosing a platform as a beginner trader. Study and learn to ask the right questions:
- Accessibility: The regulations in place in your country determine whether a cryptocurrency exchange can legally operate in that geography. For example, the USA is a geography where many stock exchange platforms cannot serve because its financial regulations are extremely strict. When choosing an exchange platform, first make sure that it is available in your area.
- Variety of coins offered: Although DEXs offer more coin options compared to CEXs such as Binance, Kraken, or Coinbase will often be sufficient for you, especially if you want to invest in popular coins. As you review each platform, also take a look at the coin options they allow to buy and sell. Especially if you want to build a long-term profit strategy by investing early in a project that has just been launched, do not register before finding the exchanges where that coin is listed.
- Transaction fees: Although very low compared to traditional exchanges and banks, cryptocurrency exchanges may also impose certain transaction fees for transactions (in addition to the gas fee, the term used to describe the amount taken by the network itself, not by the exchange, for the related transaction). Fees become even more important, especially for traders who will trade with high amounts.
- Security measures: A cryptocurrency exchange is expected to take a number of measures, both in terms of privacy and security. These measures can be encryption protocols, mail notifications with security codes, 2FA security systems, biometric verification technologies, insurance packages, and much more. Learn the security measures offered by the platforms and compare them with each other.
- Liquidity: If you want to be able to sell a cryptocurrency at any time and at the price you set, the exchange platform you choose should have high liquidity. You can check the market capitalization data of the related exchange from coinmarketcap.com.
- Storage options: Exchange platforms can offer safe methods of storing your cryptocurrencies with the hot wallet options they offer. However, it is your choice to choose custodial wallets or to turn to non-custodial cold wallets. To learn more about it, check out our review of cryptocurrency wallets.
Types of Crypto Exchanges: Centralized (CEX) and Decentralized (DEX) Platforms
You can choose decentralized exchanges or decentralized ones to trade cryptocurrency. These exchange platform types, which can be briefly called DEX and CEX, are differentiated from each other according to who is the person who will control your funds while trading.
Centralized Cryptocurrency Exchanges (CEXs)
The main feature of centralized cryptocurrency exchanges is that they actually work as a broker account. The control over your funds belongs to the relevant exchange platform, and the platform has the opportunity to keep your assets in circulation until you withdraw your funds from the platform. While using such platforms, you can use the crypto wallets they offer. But the custody of your funds, that is, private key control will belong to the platform. When choosing between CEXs, it is always important to choose platforms that keep user funds in a cold and publicly announced wallet. In this way, you can be sure that the money is kept safe, that a pyramid is not returned by the platform or that cryptos are not used for different purposes.
The most popular CEX platforms are Binance, Coinbase Exchange, Kraken, and FTX. Learn more about CEXs by going to the related article.
Decentralized Cryptocurrency Exchanges (DEXs)
Decentralized cryptocurrency exchanges, the most popular being Uniswap and Pancakeswap, give you control over your funds. Traders perform their transactions, supported by smart contracts, on these platforms in a completely autonomous manner (without any need for identity verification or giving the custody of the wallet to someone else). All these transactions, which can be viewed on the blockchain, are performed the peer-to-peer or peer-to-smart contract.
The most popular DEX platforms are Uniswap, Pancakeswap, Binance DEX, Curve, 0x, dYdX, and Balancer. Learn more about DEXs by going to the related article.
Advantages of Trading on CEX and DEX
We have listed the brief advantages of trading on CEXs and DEXs. To learn better, you should go to the related article on the concept.
Advantages of Trading on CEXs
- High liquidity: CEXs are platforms with a very high liquidity ratio. Since the daily trading volumes are high, the direct processing time of buy and sell orders is very short. This almost guarantees that the number of coins you request will be bought and sold at the value you request.
- Customer help & educational content: CEX platforms have various financial transaction alternatives such as staking, margin credits, and altcoin trading, similar to DEXs. But additionally, the fact that the platform has a center makes it possible to provide extra customer help and a sense of security.
- Good for beginners: CEXs have powerful interfaces that are offered at high budgets and are constantly optimized and are generally easy to use. Users can easily perform their purchases and sales through this simple interface.
Advantages of Trading on DEXs
- No registration process: DEXs are platforms that users can sign up and use by simply connecting their wallets and without sharing any identity information. You don’t need to share your photo, you don’t need to provide your credentials. You can quickly become a member and start trading.
- No data center: They also do not have a central database. This means that users’ private keys or funds are not stored in an easily-hackable center. Due to its inherent nature, DEX may become a more secure area for data theft than CEXs.
- Advantageous APY rates: DEXs can be described as very convenient areas for traders who want to benefit from DeFi objects, with extra advantageous APY and interest rates.
Risks of Trading on CEXs and DEXs
Before moving on from this topic to the next, it may be helpful to be aware of the risks that CEX and DEX platforms, in general, can bring along with the trading process. We have prepared a shortlist for you:
Risks of Trading on CEXs
- Security vulnerabilities: Especially when you prefer exchanges with low trading volume and relatively less prestigious, keeping your funds in a certain center can cause serious security vulnerabilities. Stock market hacks that occur will mean your entire asset is stolen if you’re in the wrong place at the wrong time.
- Regulations: Centralized exchanges also mean auditable exchanges. A new legal regulation about the funds and the platform itself may mean examining all transactions and seizing assets on a short or long-term basis. Editability and audibility can undermine your financial freedom.
- Privacy: A large amount of information you provide in authentication processes can be used criminally when captured by a good enough hacker group.
Risks of Trading on DEXs
- Risk of losing private key: It is true that DEXs, which you can use with your non-custodial wallets, offer great performance in terms of privacy. However, this performance means that you are fully responsible for asset management and wallet private key protection. This means that if you lose your private key, there is no central authority that will allow you to regain access to it. You will also lose your assets forever. For this reason, many people say that private keys should be stored offline, in a sufficiently secure and dispersed manner.
- Risk of smart contracts: In DEXs, financial transactions are completed using smart contracts. This makes any vulnerability found in smart contracts vulnerable to hacking of the transaction and theft of funds. To avoid this risk, it is necessary to prefer popular DEX platforms as much as possible.
- Low processing speed: Relatively low liquidity or peer-to-peer transaction structure may cause orders to be released later. Especially for DEXs that are not very popular.
What is the best cryptocurrency exchange in the United States?
You decide which is the best by evaluating the factors. But when we sort them in terms of volume, it is possible to say that Coinbase, Kraken, Binance US, and Gemini are the most popular options. All of these are of course evaluated in the CEX category.
Can you earn a living by day trading in cryptocurrency?
In the crypto money world, especially for altcoins, the high volatility values can cause the income that can be obtained with daily trading to be high. Of course, it is of great benefit to progress by evaluating the necessary metrics and following the market regularly.
How do stop orders work on crypto exchanges?
Stop-loss orders are transactions that are automatically executed when the relevant value is reached after you specify the amount and price level you want to sell in a particular cryptocurrency. The fact that cryptocurrency exchanges do not close on weekends like traditional exchanges and operate 24/7 makes continuous trading and market monitoring impossible. Traders activate such orders in order to maintain a certain profit rate and avoid risks.
Is it expensive to build a crypto exchange website?
According to the market research, it is necessary to sacrifice approximately 500,000 USD in order to create an effective, user-friendly, secure and reliable crypto exchange website. This budget may be slightly lower for DEXs.