What is a cryptocurrency exchange?
Cryptocurrency exchange is typically a centralized online platform that accepts deposits and allows to trade cryptocurrencies or tokens. Exchanges usually charge a commission on every trade. Most platforms allow withdrawing assets in crypto, while the most advanced exchanges support direct fiat withdrawals to a bank account.
To trade, one needs to make a deposit, either by connecting a personal wallet or by transferring a certain amount of assets to a private exchange wallet. Once assets are deposited, it is possible to buy and sell the digital assets using the order book. The exchange rate is usually specified by the user.
Types of cryptocurrency exchanges
Cryptocurrency exchanges can generally be viewed in 2 categories, centralized and decentralized.
Centralized exchanges are the most popular as they allow to achieve the fastest transaction processing speed and scalability, hence – the best user experience. However, due to the centralized architecture, this type of exchanges are vulnerable to cyber-attacks. According to rados.io, more than 980 000 bitcoins have been stolen from exchanges and most of them were centralized.
Decentralized exchanges use the blockchain technology to secure transactions, not requiring to store deposits in a centralized storage, making them much more resistant to hacks. However, due to scalability issues of blockchain decentralized exchanges are much less stable and work slower compared to their centralized counterparts. An example of a popular decentralized exchange is IDEX.