Broadly speaking, there are two categories of crypto exchanges: centralised and decentralised. Each category comes with its advantages and disadvantages.
Centralised Exchanges
Centralised crypto exchanges (CEX) are managed by one organisation. Centralised exchanges make it easy to start cryptocurrency trading by allowing users to convert their fiat currency, like Australian dollars, directly into crypto. The vast majority of crypto trading takes place on centralised exchanges.
Some crypto enthusiasts object to centralised exchanges because they run counter to the decentralised ethos of cryptocurrency. Even worse, in the eyes of some crypto users, the company or organisation may require users to follow Know Your Customer (KYC) rules. These require each user to divulge their identity, much as you would when you apply for a bank account, to combat money laundering and fraud.
There’s another concern with centralised exchanges: hacking. With a CEX, the exchange holds the crypto traded on its platform—at least in the short term, while trades go through—raising the risk of hackers stealing assets.
Centralised crypto exchanges have beefed up security over recent years to address this risk. Among other strategies, they now store most customer assets offline and take out insurance policies to cover crypto losses in the case of hacking.
If you like the convenience of a centralised exchange, you can reduce your risk by transferring crypto to a separate, off-exchange hot or cold wallet.
Decentralised Exchanges
A decentralised exchange (DEX) is a marketplace where users can trade cryptocurrencies directly with one another without the involvement of intermediaries. This means that there is no need for a third party to oversee the transfer and custody of funds. Instead, DEXs use blockchain-based smart contracts to enable the exchange of assets, effectively replacing traditional intermediaries such as banks, brokers, and CEXs.
In contrast to transactions processed on a CEX, which lack transparency and rely on an intermediary, DEXs provide complete transparency regarding the movement of funds and the mechanisms involved in the exchange. Additionally, DEXs reduce counterparty risk by eliminating the need for user funds to pass through a third-party cryptocurrency wallet during trading. This, in turn, can mitigate systemic centralization risks within the cryptocurrency ecosystem.
Unlike their centralised counterparts, DEXs do not typically use an order book system for trades. 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 in that it creates instant access to liquidity that would have otherwise been inaccessible, allowing for trading of assets with low liquidity. Due to access to instant liquidity, buyers and sellers do not need to wait for their order to match with a counterparty, allowing the trade to execute immediately. Liquidity providers to DEXs earn fees from the trading activity, creating an opportunity for passive income generation.
However, there are some drawbacks of DEXs. A major disadvantage is that decentralised exchanges are much less user-friendly, not only from an interface standpoint but also in terms of currency conversion. Decentralised exchanges, for instance, don’t always allow users to deposit dollars and exchange them for crypto. This means you either have to already own crypto or use a centralised exchange to get crypto that you then use on a DEX. For this reason, many newer investors will stick to CEXs due to their ease of use and one-stop-shop functionality.
Global Crypto Exchanges
There are nearly 600 cryptocurrency exchanges worldwide inviting investors to trade bitcoin, ethereum and other digital assets. But costs, quality and safety vary widely. With an emphasis on regulatory compliance, Forbes Digital Assets ranked the top 60 cryptocurrency exchanges in the world.
