Cryptocurrencies have been established to be assets which that hold certain value in terms of price valuation, this valuation is as a result of what market participants think of that particular cryptocurrency. As a result of this, it is possible for a cryptocurrency to be exchanged or traded for another cryptocurrency or for a cryptocurrency to be traded for fiat currencies or other asset classes. The possibility for exchange and trading of cryptocurrencies have opened up a new market for trading these digital assets which is popularly referred to as the cryptocurrency exchange market.
The cryptocurrency market is a very large one with more than 1,000 different cryptocurrencies both the documented and undocumented now available to be traded on a daily basis. For these cryptocurrencies to be traded properly, a medium that helps bring together participants in the form of buyers and sellers is very vital. Cryptocurrency exchanges act as that bridge that helps facilitate trade activities for cryptocurrency market participants.
Cryptocurrency exchanges are platforms or tools which ensure the exchange of one cryptocurrency for another cryptocurrency, fiat currency or other asset class. The main function of cryptocurrency exchanges is to help facilitate trading of these digital assets within a secured environment that is well organised.
Cryptocurrency exchanges mostly serve as intermediaries for participants in the cryptocurrency market to easily buy and sell their cryptocurrency assets while ensuring they are less susceptible to risk of fraud.
Classification of Cryptocurrency Exchanges
In the context of trading the cryptocurrency market, exchanges tend to be classified into two very broad types according to their working mechanism: Centralized Exchanges(CEX) and Decentralized Exchanges(DEX)
Centralized Cryptocurrency Exchanges(CEX)
Centralized cryptocurrency exchanges are the type of exchanges which are mostly managed by a private company. This private company acts as a middleman and takes responsibility for conducting cryptocurrency trades and transactions among market participants.
In facilitating trading activities among cryptocurrency market participants, centralized exchanges provide tools to ease usage as well as ensure liquidity for trading these cryptocurrencies are readily available. Centralized exchanges are mostly known to create wallet addresses to their users, these wallet addresses are mostly referred to as exchange wallet addresses, users do not have access to the private keys information of these wallet addresses as they are managed by the exchange.
A major advantage of centralized exchanges is the fact that they provide a trusted means for trading cryptocurrencies as users can be sure to trust the company in charge of the cryptocurrency exchange. On the other hand, the failing of centralized exchanges lies in their susceptibility to cyber attacks and downtime, one needs to look out for one which solves and manages these problems in the best possible ways and timely.
Popular examples of centralized cryptocurrency exchanges are Binance, Okek, Kucoin etc
Decentralized Cryptocurrency Exchange(DEX)
Decentralized cryptocurrency exchanges are cryptocurrency exchanges that remove the need for a trusted intermediary to facilitate cryptocurrency trades, a feature that is very common with its centralized exchange counterparts. Decentralized exchanges allow cryptocurrency transactions through a trustless automated environment that is made possible through codes based on smart contract instructions.
Decentralized cryptocurrency exchanges do not require the processes of signups and rigorous verification processes that are very common with centralized exchanges, all that is needed to use decentralized exchanges is a wallet address of the user who intends to carry out transactions with the exchange.
Decentralized exchanges are less susceptible to cyber attacks and downtime from system infrastructure but they tend to suffer from lower liquidity as not too many people trade actively on these platforms thereby leading to lower trading volume. In addition to this, many decentralized exchanges do not have features that enable users to trade cryptocurrency to fait and vice-versa.
Popular Examples of decentralized cryptocurrency exchanges are Uniswap, 1inch, Pancakeswap etc.
