A cryptocurrency exchange, or simply a crypto exchange, is a specialized online platform designed for the trading of digital currencies against various assets. It also provides services for storing cryptocurrencies and earning interest on them. In straightforward terms, a crypto exchange functions as an intermediary, streamlining the exchange process and ensuring its security for both buyers and sellers. Notable platforms in this space include Binance, Coinbase, ByBit, Changelly, Huobi, Kraken, and others.
Most crypto exchanges not only support a variety of cryptocurrencies (learn more about what cryptocurrencies are by following this link), but also national currencies. This feature allows users to easily fund their exchange balances through familiar payment systems.
The legal regulation of a cryptocurrency exchange’s activities is contingent on both the legislation of the jurisdiction where it is registered and the laws of the country in which it operates. In many countries, the existing legal framework is not flawless, leading to numerous conflicts and challenges in the industry.
The Evolution of Crypto Exchanges
Before the inception of crypto exchanges, users had limited avenues to acquire cryptocurrency. It was either “mined” through the process of mining (to explore more about cryptocurrency mining, click here) or obtained through direct exchanges on specialized forums.
Both methods were either time-consuming or posed security risks.
In March 2010, just a year after the first Bitcoin was mined, the Bitcoin Market crypto exchange emerged. At that time, a single bitcoin was valued at around $0.003 and could only be exchanged for American currency via PayPal. While this exchange swiftly gained popularity, the rise of numerous similar services led to its eventual displacement by competitors.
The landscape of cryptocurrency exchanges worldwide is dynamic, with the number of platforms constantly changing. According to Forbes, at the time of writing, there are approximately 600 crypto exchanges globally.
Types of Cryptocurrency Exchanges
Various types of cryptocurrency exchanges are now available to users, including:
Centralized Exchanges (CEX): These operate under the regulation of a central governing body. Users on these platforms can not only exchange, sell, and buy cryptocurrency but also store it. The advantages of CEX include a higher level of protection for client assets, incorporating measures such as:
- KYC user verification (learn more here),
- due diligence for comprehensive client profile checks,
- continuous monitoring of transactions and IP addresses, among others.
The specific security measures, however, vary from one crypto exchange to another.
While CEX offers enhanced security, some argue that their activities run counter to a fundamental principle of blockchain — namely, the absence of centralization and a single control centre (further insights into blockchain can be found here).
Decentralized Exchanges (DEX): These platforms bring together buyers and sellers of cryptocurrencies without centralized management. Unlike centralized exchanges, decentralized exchanges do not store cryptocurrencies, and user registration is not required. Transactions are facilitated through smart contracts and recorded on the blockchain. DEX, in comparison to CEX, typically has lower liquidity, higher transaction commissions, and lacks the option to dispute transactions. However, they offer the advantage of allowing traders to maintain anonymity.
P2P Platforms (Peer-to-Peer): Peer-to-peer platforms operate like a message board. Users register on the service, post an advertisement expressing their desire to exchange one currency for another, and await responses. As a precaution against fraud, the algorithm transfers the required amount of assets to a temporary balance (escrow account) when the ad is placed. To complete an exchange, confirmation from both parties is necessary. P2P platforms offer advantages such as low commissions and user anonymity, but drawbacks include slower transaction speeds and a higher risk of encountering scammers.
On any cryptocurrency exchange, users incur commissions for various services, including exchange, deposit, withdrawal, and account maintenance.