Broadly speaking, there are two categories of crypto exchanges: centralized and decentralized. Each category has its advantages and disadvantages.
Centralized crypto exchanges (CEX) are managed by a single organization. Centralized exchanges make it easy to start cryptocurrency trading by allowing users to convert their fiat currency, such as Australian dollars, directly into crypto. The vast majority of crypto trading takes place on centralized exchanges.
Some crypto enthusiasts object to centralized exchanges as they go against the decentralized ethos of cryptocurrency. Even worse, in the eyes of some crypto users, the company or organization may require users to follow Know Your Customer (KYC) rules. These require each user to reveal their identity, just as you would when applying for a bank account, to combat money laundering and fraud.
There is another problem with centralized exchanges: hacking. With a CEX, the exchange holds the crypto traded on its platform – at least in the short term, while transactions continue – increasing the risk of hackers stealing assets.
Centralized crypto exchanges have beefed up security in recent years to address this risk. Among other strategies, they now store most client assets offline and take out insurance policies to cover crypto losses in the event of a hack.
If you like the convenience of a centralized exchange, you can reduce your risk by transferring crypto to a separate, non-exchange-based hot or cold wallet.
A decentralized exchange (DEX) is a marketplace where users can trade cryptocurrencies directly with each other without going through intermediaries. This means that no third party is required to oversee the transfer and custody of funds. Instead, DEXs use blockchain-based smart contracts to facilitate the exchange of assets, effectively replacing traditional intermediaries such as banks, brokers and CEXs.
Unlike transactions processed on a CEX, which have no transparency and rely on a middleman, DEXs provide full transparency regarding the movement of funds and the mechanisms involved in the exchange. In addition, DEXs reduce counterparty risk by eliminating the need for user funds to pass through a third-party cryptocurrency wallet while trading. This, in turn, can reduce systemic centralization risks within the cryptocurrency ecosystem.
Unlike their centralized counterparts, DEXs typically do not use an order book system for transactions. Instead, they use Automated Market Makers (AMMs). An AMM can be thought of as a money robot that can quote a price between two or more digital assets. This system is beneficial because it creates instant access to liquidity that would otherwise have been inaccessible, allowing low liquidity assets to be traded. Access to instant liquidity means that buyers and sellers do not have to wait for their order to match a counterparty, allowing the transaction to be executed immediately. Liquidity providers of DEXs earn fees for trading activity, creating an opportunity for passive income generation.
However, there are some drawbacks of DEXs. A major drawback is that decentralized exchanges are much less user-friendly, not only in terms of interface, but also in terms of currency conversion. For example, decentralized exchanges do not always allow users to deposit and exchange dollars for crypto. This means you either need to already own crypto or use a centralized exchange to get crypto which you then use on a DEX. For this reason, many newer investors will stick with CEXs for their ease of use and one-stop-shop functionality.
Global crypto exchanges
There are nearly 600 cryptocurrency exchanges worldwide that invite investors to trade bitcoin, ethereum, and other digital assets. But cost, quality and safety vary widely. With an emphasis on regulatory compliance, Forbes Digital Assets ranked the top 60 cryptocurrency exchanges in the world.