Choosing a crypto exchange is one of the first things to do when you decide to start your journey in crypto trading. The market offers a ton of trading platforms to pick from. Exchanges vary by popularity, liquidity, features, and, perhaps most importantly — by type. In this article, we are going to talk about the 3 major crypto exchange types — centralized, decentralized, and hybrid — and help you choose the best option for your needs.
What Is a Crypto Exchange and Why Do You Need It?
A crypto exchange is a trading platform where you can buy and sell digital currencies. Mainly, exchanges allow two types of transactions:
To earn money, crypto exchanges charge their clients with trading fees, which are paid per trade or a percentage of your monthly trading volume.
What are the 3 Crypto Exchange Types?
Depending on the architecture, a crypto exchange may be:
- Centralized (CEX): stores and manages your funds and personal data (much like your bank);
- Decentralized (DEX): facilitates peer-to-peer trading, like an online market place.
- Hybrid (HEX): combines the features of both CEX and DEX.
What is a CEX?
This is the most common crypto exchange type. Traders choose centralized exchanges because they are the most convenient and efficient — able to execute orders within seconds, CEX platforms suit the needs of scalpers and day traders perfectly. No wonder then, that, the overwhelming majority of market-leading platforms are centralized.
Here’s where its easy to get confused. The blockchain technology is decentralized by nature. So how can a trading platform be centralized?
At a closer look, there is no clash of ideas. “Centralized” exchange takes control of your funds s a third party and makes transactions on your behalf. The funds themselves remain decentralized.
Reasons to consider a centralized exchange.
- CEX complies with regulations: CEX platforms must check customer identity via a KYC procedure and must have a license. As such, they are legally responsible for your funds.
- CEX offers high liquidity: Centralized exchanges hold around 99% of the total crypto trading volume. There, you can buy and sell coins fast — an important condition of successful trading.
- CEX support Fiat-crypto trading pairs: you can quickly convert your crypto to fiat and vice versa on a centralized exchange.
On the dark side, centralized exchanges require you to give up control of your funds and compromise on security. This makes them a favorite target of cyberattacks.
What is a DEX?
A decentralized exchange facilitates peer-to-peer trading. Unlike CEX, DEX doesn’t hold any money. It matches buyers with sellers, automates their interaction, and takes a fee for it.
There is no need to deposit funds to an account. Instead, DEX issues proxy tokens reflecting BTC, ETH, or other coins you possess. They participate in your DEX transactions, the blockchain storing all the info about the process. Then, you may convert these proxy tokens into regular BTC and ETH.
Reasons to consider a decentralized exchange:
- Security: since there is no centralized party that controls funds, it would be almost impossible to carry out a cyberattack against a DEX.
- Privacy: a lot of decentralized exchanges don’t require any form of identity confirmation.
On the downside, DEX platforms often shy away from fiat. The reason is simple: crypto-fiat transactions mean additional legal restrictions and private data exposure. Secondly, they have lower trading volume and therefore lower liquidity. What’s more, a typical decentralized exchange lacks many essential trading features like stop-loss orders.
What Is a HEX?
As the name suggests, hybrid exchanges (HEX) are supposed to combine the best of both worlds. Matching the liquidity and functionality of CEX with the security and privacy of DEX — they are ideal trading platforms, at least in theory.
As promising as the idea may sound, the hybrid exchange concept is still in an embryo stage. There are few projects that deliver the complete value of a hybrid platform. Even less provide sufficient trading volume. While still more visionary than practical, it’s very likely that hybrid exchanges will be the future. We just have to wait for that day to come, but for now, HEX is perhaps the least practical option.
Reasons to consider a hybrid exchange:
What is the Best Crypto Exchange Type?
Right now? There isn’t such a thing. Hybrid exchanges could potentially fill this niche, but for now, they are a work-in-progress.
The choice between DEX and CEX is what you are essentially left with. The decision depends entirely on your priorities.
From a practical standpoint, a centralized platform offers convenience, speed, and functionality, but forces you to compromise on security. Decentralized exchange wins when it comes to transparency and funds safety, but offer a more modest feature set and lower liquidity.
For most people, usability wins. The overwhelming popularity of centralized platforms speaks volumes on the matter. However, if you are not looking to trade hard and fast, decentralized exchanges just might be right for you.