A cryptocurrency exchange is an online platform that allows users to trade fiat for cryptocurrency and exchange crypto for other coins.
Cryptocurrency exchanges are platforms act as intermediaries between the buyer and seller between different blockchains and institutions. By doing so, they enable their users to exchange real-world currencies for digital currencies such as Bitcoin (BTC), altcoins and tokens.
This is possible due the cryptocurrency exchange platforms traditionally being connected either to the user’s personal crypto wallet or wallets, or to their exchange platform-specific crypto wallet. They can also often connect to the user’s credit card or online payment account such as PayPal.
Many people choose to use them because they find them easier than trying to coordinate private exchanges, and also because the platform fees are generally lower than if the exchanges were performed directly through the blockchain.
Types of Cryptocurrency Exchanges
There are two main types of cryptocurrency exchange platforms, namely centralized and decentralized platforms.
These are the primary type of cryptocurrency exchange platforms. They are the ones that act as intermediaries between third-party users of the platform for all types of fiat and cryptocurrency exchanges. The facilitate contracts and transactions to ensure that the transactions go smoothly. Since they are designed for these functions, they are more reliable and secure than other methods of trading. However, since the business is centralized, it is also more susceptible to hacking and other malicious attacks.
Examples of this include the infamous Mr. Gox and Binance hacks. It is for this reason that most seasoned cryptocurrency traders recommend that crypto currency exchange platform users should only hold the amount of cryptocurrency in their platform-based account that they actually wish to transact. Then, once it is done, it should be sent to their private e-wallet or other financial account. This way if password lists are somehow hacked into, the user’s crypto and fiat currencies will not be at risk of being stolen.
Decentralized blockchain exchanges (DEXs) utilize a blockchain in order to facilitate transactions on their platform. However, since it is blockchain-based, they can only be used to exchange cryptocurrencies. Furthermore, all transactions are done on a peer-to-peer (P2P) basis by means of smart contracts. However, although a DEX is more secure than a centralized cryptocurrency exchange platform, they are less popular because they require more knowledge of cryptocurrency values and smart contracts in general, which can be intimidating for users.