Different types of crypto exchanges

In the previous chapter, we learned what a crypto exchange is and, in essence, how it works. Namely, we know several types of crypto exchanges, each of which has its own advantages, disadvantages and different offerings. Therefore, it is important to understand their differences before choosing the one that best suits our needs.

One of the most common types of crypto exchanges are centralized exchanges, or CEX for short. They are operated by the companies that created them and require users to go through a Know Your Customer (KYC) process before they can trade. Based on this, centralized exchanges also enable the exchange between fiat and cryptocurrencies, as the identification satisfies the Law on Money Laundering and Terrorist financing. In general, centralized exchanges are easy to use and offer a wide range of services.

Another type of exchanges are decentralized exchanges or DEXs. They operate on a decentralized network, meaning they have no central authority to control them. These are usually programs that allow users to trade directly with each other without a third party having control over their funds. Decentralized exchanges are considered safer than CEXs as there is no connection with users’ funds. However, they may have less liquidity and may not offer as many features as centralized exchanges. They also don’t allow trading between fiat and cryptocurrencies, and, in most cases, do not require a KYC process.

The third type of exchanges is the hybrid exchange. These try to combine the best of both worlds. They provide the functionality and liquidity of centralized exchanges, with the privacy and security of decentralized exchanges. They can act like a CEX, but at the same time offer users the possibility to trade directly with each other without the need for a central authority. Hybrid exchanges may offer a wider range of services than DEXs, but may still have some of the security risks associated with CEXs.