An Introduction to Crypto: Cryptocurrency Exchanges
Are you new to crypto? Even if you aren’t, you might be looking for an efficient way to turn your fiat currency (Dollars, Euro, Yen, etc) into cryptocurrency, or exchange one kind of cryptocurrency for another. At the moment, the most popular tool for executing these kinds of transfers is the cryptocurrency exchange.
A crypto exchange is an architectural framework that lets crypto buyers and sellers find each other and execute trades. While gauging the exact number of exchanges out there is tricky, there is no doubt that the number is high — an April 2018 analysis from Bitcoin.com identified over 500 active exchanges!
Exchanges tend to vary when it comes to the trading pairs they offer, the size of their user base, and their daily trading volume. Some traders use exchanges (or brokerages) to purchase payment-oriented coins like Bitcoin and Litecoin so that they can acquire the funds needed to purchase goods and services, or to purchase other altcoins. .
Many decentralized applications (DApps) and other blockchain-based tools require users to hold or spend utility tokens on their underlying platform. For instance, Ethereum requires users to make a small ETH payment to execute transactions or smart contracts.
Traders interested in using these platforms — or stocking up for the platform’s launch — often turn to exchanges to purchase these utility tokens. And of course, some exchange users are executing trades to make money, following the same ideologies and strategies that govern profiting in traditional stock or commodity’s markets.
Your Crypto Exchange Options
No exchange is precisely the same as the next, however, most exchanges can generally be placed into one of four distinct categories:
Centralized Exchange (CEX) — Centralized exchanges are by far the most popular kind of exchange operating today. On a centralized exchange, the exchange ultimately has control over the consumer’s deposits and keeps a portion of the deposits in a shared wallet — typically called a ‘hot’ or ‘pooled’ wallet — owned by the exchange. Consumer funds stay in that single location — the hot wallet — until a user withdraws their claim (the percentage of crypto they own in regard to the total amount of pooled funds) from the exchange. Since all of this happens from the centralized exchange’s database, and not necessarily on-chain, when a trade is made, the database updates to align with the current status and balances that stem from the most recent exchange records of who owns what in which wallet. However, the underlying cryptocurrency doesn’t actually move — rather, the balances stored in the CEX’s database get updated. This makes transaction settlement on CEXs relatively fast. Furthermore, CEXs tend to have a wide array of popular trading pairs and access to high trading volume — which in turn means more liquidity and better pricing options. In addition, CEX’s typically have friendlier and easier to use user-interfaces.
Although CEXs are popular — they’re far from perfect. Users have to give up custody of their funds to use CEXs, and CEX wallets are frequent targets for theft because of this. And since CEXs have control over their users’ trades and funds, operators can charge high fees or even unilaterally stop trading if they really needed — or wanted — to.
Decentralized Exchanges (DEXs) — Decentralized exchanges differ from CEX’s in the fact that they are decentralized rather than consolidated into a single command center. DEX’s distribute the computing power and custody arrangements of their exchange over a decentralized network of nodes rather than storing them all in one wallet or server farm — like most centralized exchanges do. Decentralized exchanges often allow peer-to-peer trades between user wallets, where crypto moves from one user directly to another, instead of having to be deposited or withdrawn from a centralized third party. The P2P, network-based structure of DEX’s renders them far more secure than centralized exchanges.
Many supporters of blockchain technology would argue that DEXs reflect the decentralized, democratized ethos of the blockchain and cryptocurrency industry; however, DEXs are less popular for a reason that is partially tied to their decentralized nature — trades often settle far slower than they do on CEXs. This exposes traders to significant potential losses since the probability of a partial fill of a traders order is much higher on a DEX. In addition, decentralized exchanges tend to have low liquidity and less popular trading pairs.
Over-the-Counter (OTC) — Through an Over-the-Counter marketplace — think LocalBitcoins — buyers and sellers connect privately and agree on the terms of the trade rather than inputting a concrete, blanket price that encapsulates the trading pair throughout the entire exchange. These deals, which occur outside of traditional public exchanges, are known as Over-the-Counter trades.
Trading through an OTC exchange like LocalBitcoins often involves more steps than trading on a centralized or decentralized exchange would. That being said, if you are a day-trader, using an OTC will not be worth your time; however, OTC trades can result in significant savings for large, one-time deals.
Hybrid Exchange — A hybrid exchange combines multiple attributes of different exchange models. The combination of components is limited only by technical feasibility and developers’ imaginations, which means there’s lots of variation in this fledgling class of exchanges.
All About Amplify
So now that you know about the different types of exchanges, you might be wondering, what kind of exchange are they building over at Amplify?
Ultimately we’re creating a hybrid exchange that combines attributes of CEXs, DEXs, and OTC desks into one platform. It’s an ambitious project, but the way we will unroll this project gives users access to Amplify’s services sooner rather than later.
Our rollout plan consists of three phases.
Phase one: the Amplify Brokerage
In addition to OTC services, the Amplify Brokerage will offer traders the best available prices for popular trading pairs by sourcing trades under an umbrella of exchanges.
Phase two: Amplify Distributed
The Amplify Distributed Exchange uses and builds on top of the foundational architecture supporting phase one. But in phase two, Amplify becomes a CEX where users will have access to the high liquidity and market-based pricing of the brokerage platform, yet, will be able to access trades directly on the Amplify platform, rather than through their brokerage service.
Phase three: Amplify Hybrid
In Phase three, Amplify Distributed combines with a decentralized model of the Amplify Exchange to create the Amplify Hybrid Exchange — the final phase of the project. While Amplify Distributed maintains a CEX version of the exchange, Amplify Decentralized spreads transaction processing across a network of node operators while offering increased speed, user-friendliness, and liquidity relative to the earlier phases.
Finding the type of cryptocurrency exchange that is right for you is a highly personal decision that depends on traders’ needs, their crypto areas of interest, and even their personal values. It is imperative to Do Your Own Research, but hopefully, we’ve given you enough information to continue your search!
We hope to see you using the Amplify exchange in your trading tool suite. But nonetheless, whether you wind up relying exclusively on Amplify, using it with a suite of other crypto trading services, or passing over us all together, you should carefully choose the exchange you are going to use!
