An In-Depth Analysis of How Cryptocurrency Exchanges Work

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An In-Depth Analysis of How Cryptocurrency Exchanges Work

Cryptocurrency exchanges play a fundamental role in the digital currency ecosystem. They provide the main transition point between fiat and virtual currencies whilst also managing the prices of individual tokens and coins. However, no matter their importance, the work made by cryptocurrency exchanges is often overlooked or misunderstood. This guide should help you better understand these fascinating platforms.

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What Type of Exchanges Exist?

There are currently three main types of cryptocurrency exchanges. These are:

  • Centralised Exchanges
  • Decentralised Exchanges
  • Hybrids

Centralised Exchanges (CEX) are the traditional ones that are managed by a company or central organisation. Their primary role is to exchange digital currencies, with the majority accepting fiat conversions. An example of a centralised exchange is the aptly named, CEX.io.

CEXs can be further categorised into Synchronous Exchanges and Asynchronous Exchanges. Synchronous Exchanges comply with users’ requests through a single transaction. Such platforms are generally small and more prone to failures. They are not designed to handle large volume transactions.

Asynchronous Exchanges put users’ requests in a queue. Requests are processed individually using a layering system that communicates the status of each request directly to the interface. With this infrastructure, these exchanges are capable of handling both small and large volumes of transactions.

A Decentralised Exchange (DEX) is different from a CEX as it does not depend on any organisation to function. Service is offered to users through an automated process and assets are exchanged in what is known as a peer-to-peer (P2P). DEXs are built using blockchain technology and smart contracts. It is not surprising to learn, therefore, that most of these exchanges operate using Ether.

A Hybrid Exchange combines the characteristics of CEX and DEX. These exchanges offer a very safe transaction environment which also offers high speeds and low latency. Although it may be owned by a central organisation it does not depend on it to carry out transactions, basing itself on the rules set about in the smart contract.

Why Do DEXs Exist?

With CEXs being the preferred exchange for most crypto traders, asking why DEXs exist in the first place is certainly a fair question. In reality, whilst CEXs facilitate cryptocurrency transactions they are not as autonomous as you would expect, given the decentralised industry they operate in.

DEXs are built on the notion that cryptocurrency transactions should have no third parties. The sender and receiver should be the only ones involved, yet CEXs also include a platform, which is managed by a central entity. This entity is ensuring that your money is safe, but is also taking a fee for this.

With DEXs you and only you are responsible for the security of your funds. Your control includes the decision on exactly when and how to trade or carry out other transactions. In these ways, such exchanges offer you the most personal trading experience you can ever hope for.

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