[Blockchain 101] Different types of cryptocurrency exchanges.
What type of exchange do you want to use?
There are an increasing number of crypto-exchanges joining the market today, to make conversion easier for users, and to take a step towards mass adoption. But there’s not only one type of exchange.
Below are the main types of exchanges, and their differences:
Centralised Exchanges
Centralised cryptocurrency exchanges are online platforms used to buy and sell cryptocurrencies. They are the most common means that investors use to buy and sell cryptocurrency holdings.
In the term “centralised cryptocurrency exchange,” the idea of centralisation refers to the use of a middleman or third party to help conduct transactions. Buyers and sellers alike trust this middle man to handle their assets. This is common in a bank setup, where a customer trusts the bank to hold his or her money. The reason for this setup is that banks offer security and monitoring that an individual cannot accomplish on his or her own. In the case of a centralised cryptocurrency exchange, the same principle applies. Transactors trust not only that the exchange will safely complete their transactions for them, and they also make use of the network of users in the exchange in order to find trading partners.
Decentralised Exchanges
The most commonly accepted definition of a ‘decentralised exchange’ is “a protocol which facilitates the exchange of assets, while not holding its users’ assets directly”: the exchange does not hold the keys to the assets deposited and is therefore ‘trustless’.
This may involve the depositing of assets into a smart contract, from which only users making the trade can withdraw them. Trustless custody of funds is essentially what gives an exchange the right to call itself decentralised.
Hybrid Exchanges
Neither centralised nor decentralised exchanges provide complete functionality allowing institutional and retail investors to trade efficiently in the market. Centralised exchanges (CEXs) have become the standard as they provide quick processing of orders (low latency), liquidity, high-frequency, alongside marginal trading tools.
However, while making trusted third-party optional is one of the fundamental benefits of cryptocurrency, centralised exchanges act as third-party intermediaries. This requires users to trust their cryptocurrency funds to be kept safe by centralised exchanges, where there is potential for manipulation, government intervention, and loss of funds through hackers.
Hybrid cryptocurrency exchanges, which are known to be the next generation crypto trading marketplace aims to merge the benefits from both centralised and decentralised exchanges. More specifically, hybrids seek to provide the functionality and liquidity of a CEX with the privacy and security of a DEX. Many believe such exchanges are the real future of cryptocurrency trading experience.
Fiat to Crypto/Crypto to Fiat
Fiat-to-crypto exchanges allow the users to buy crypto directly with the aid of fiat currency like USD. Unsurprisingly, they are essential components of the blockchain/crypto ecosystem.
The main shortcoming of fiat-to-crypto exchanges is that they usually have a limited selection of coins which is available for purchase. Because these fiat-to-crypto exchanges deal with legal tender, they are constantly scrutinised by the government. Therefore, they need to religiously abide by rules and regulations.
This makes these exchanges add coins at a very slow rate. This is because they have to confirm that the coin which is added to their project are legitimate coins, and also compliant with the law
Margin Trade Exchanges
Margin trading with cryptocurrency allows users to borrow money against their current funds to trade cryptocurrency “on margin” on an exchange. In other words, users can leverage their existing cryptocurrency or dollars by borrowing funds to increase their buying power (generally paying interest on the amount borrowed, but not always).
For example, you put down $25 and leverage 4:1 to borrow $75 to buy $100 worth of Bitcoin. The only stipulation is that no matter what happens, you’ll have to pay back to $75 plus fees. In order to ensure they get the loaned amount back, an exchange will generally “call in” your margin trade once you hit a price where you would start losing the borrowed money (as they will let you borrow money to trade, but they don’t want you losing that money). A margin call can be avoided by putting more money into the position.
Transform your business today!
Visit our website at https://www.grounded.work or email us at hey@grounded.work to find out how we can work together to meet your business goals.
