If you’ve ever dealt with crypto, you know how confusing it might be sometimes. Buying crypto, spending it, trading it, it can all be very complicated, but the first and most essential question that always gets asked is “What crypto exchange should I use?” There are many exchanges, more than 200 currently, and that number is growing as each day passes. All these crypto exchanges are very different at their core; some of them are regulatory-compliant, while some of them are totally decentralized and can’t be regulated, thus operating autonomously. In this article, we’ll divide all crypto exchanges into five classes and see what the differences are between them so you can better understand what best suits your needs.
The classification of exchanges
The most important thing to understand here is that we don’t recommend any particular exchange. We can compare them, list their pros and cons, but the final choice is up to you. Some of the crypto exchanges might be unavailable in your area, but we’ll cover that as well.
These five types of exchanges are:
- Centralized – more liquidity, easy to use.
- Decentralized – all operations are settled on the blockchain, all coins are held by their owners.
- Broker – a legal centralized exchange that is fully compliant with its local regulations.
- Instant – an application for exchanging tokens quickly.
- Hybrid – a mix, combining the security of decentralized networks with the user friendliness of centralized exchanges.
As you can probably see, the distinction is made by two factors: compliance with regulations (or no compliance at all) and the entity that controls funds during the trading process. We’ll make an analysis of each type of exchange and provide some examples to make this easier to understand.
These ones are the most common, as the largest crypto exchanges in the world belong to this type. Binance, Bitfinex, Kraken – all of these platforms are centralized. It should be pretty clear as to what distinguishes them – each one of them has a centralized operator, which is responsible for its security, upgrades, functionality, and has representatives to handle public relations on their behalf. It also runs on centralized software; it only has one central server that runs all operations.
- Centralized exchanges have the biggest liquidity and volume among all types. For example, each day on Binance there are more than $450 million in trading volume. So if you want to trade big, at least operating with a few hundreds of thousands of dollars, you will find a lot of buyers and sellers there.
- Some centralized exchanges, such as Bitfinex or Kraken, can receive deposits in fiat currency. There’s a support team that can help you if something goes wrong – for example, if you sent your BCH to a BTC wallet of the exchange, they can recover them if they have private keys from both wallets.
- There is a large variety of cryptocurrencies that are traded there. Since the framework is centralized, there’s no actual exchange of currencies between users, only the transfer of ownership in the database – if user A sells 1 BTC to user B, instead of moving coins, the balances of both users get updated in the database of the exchange, while the real coins sit still in the exchange’s wallet. So any currencies, otherwise incompatible, can be exchanged between one another. But this also has its own downsides.
- All coins are stored in the wallets of the crypto exchanges; users have no real control over their funds. That’s why they sometimes get hacked and funds get lost. In case of hacking and the loss of funds, the users could be refunded – it depends on the severity of the hack. Bitfinex was hacked for $72 million in 2016 and refunded its users one year later. Mt Gox filed for bankruptcy in 2014 and it’s still in the process of returning a part of remaining Bitcoins to its customers, unable to return all funds. So it might be a long process, stretched out over years, and not all of your assets may get back to you.
- Slow withdrawal times, sometimes it may take a week to complete.
- Your open order can be closed without any notification. Bittrex has a policy of closing all orders older than 27 days.
These exchanges are completely opposite to its centralized counterpart. There is no single entity controlling them, the whole exchange is a set of smart contracts that allow for the trustless exchange of tokens. The most popular exchanges are Etherdelta and IDEX, which work on Ethereum.
- Users have full control over their funds. The exchange serves only as an order book to connect two users, buyer and seller, and help them trade two tokens via a smart contract.
- All opened trades can’t be closed by anybody except for the user. It’s forever scripted into the contract.
- There are a lot of unpopular tokens that aren’t listed on large centralized exchanges that are available for trading.
- It can’t be hacked, simply because it’s protected by the security of the blockchain. However, every user is responsible for their own security; keeping their private keys safe and sending their coins only to trusted contracts and addresses.
- Very low liquidity. The daily trading volume of IDEX is slightly over $1 million, and the daily volume of Etherdelta is only $39,000. Thus you won’t be able to sell large amounts of tokens there – a trader with a balance worth of $10,000 would be uncomfortable there based on the daily volume of the exchange.
- Every action, even placing or cancelling the order, requires paying a fee (in the case of Etherdelta, it’s a regular gas fee for the network, which is 0.21 USD at the time of writing), because it’s placed directly on the blockchain.
- Another downside is the capability to trade only inside one particular blockchain. Ether exchanges allow for the trading of ERC20 tokens, so it’s time to forget about BTC pairs if you decide to trade there.
- And the fourth con that isn’t very good is the irreversibility of all actions. If you did something wrong, you lose your funds forever, because it’s a smart contract. There is no way to cancel a transaction that has already been sent. For example, there is $1.1 million worth of EOS ERC20 tokens forever locked in Etherdelta after their conversion to EOS blockchain – their owners can’t retrieve them, because the Ethereum contract issuing these tokens ceased to exist.
- Also remember that there no fiat here. However, you can use Ethereum-based stablecoins.
Crypto broker exchanges
There is only one major crypto exchange that can be considered a broker at this time, and it’s Coinbase. It can be counted also as a centralized one, but there is one important nuance: it’s fully compliant with all regulations in US and any other country where it operates; no other centralized exchange has that kind of license. That’s why any US citizen can use it without restriction.
- Fully regulated. There’s a higher chance that user funds won’t disappear one day. Obtaining a license is a complicated process, the top managers of a brokerage are also known to regulators, so there’s no way they can pull off fraudulent activities and disappear.
- Great security. Coinbase even offers custody services to institutions. One of the best security solutions on the market, all funds are stored in cold wallets.
- A user-friendly mobile application that is easy to use, as well as the exchange interface – there are a few wallets for each asset, and two buttons for buying and selling.
- It’s still centralized, so you don’t control your coins. Most of the cons of centralized exchanges apply here as well.
- Sends all of the information about your funds to the tax inspector. You are required to pay taxes for all your gains.
- Doesn’t operate in many countries, including France, Japan, Russia, and South Korea.
- Only eight assets are available for trading – BTC, BCH, ETH, ETC, LTC, USDC, ZRX, BAT.
There are a few popular types of this exchange already – Shapeshift, Godex, Changelly. This type of platform is a simple way to exchange any cryptocurrency for another cryptocurrency. How is it different from the other exchanges? You don’t trade here against another trader, you simply trade with the service itself. It has a large pool of cryptocurrencies that allows for instant exchanges, fast and simple. You send one coin and receive another coin to a specified address. The user is charged not only a miner’s fee, but the exchange rate is higher than on other exchanges.
- It is fast and instant. No need to wait for an order to be filled. No need to get accustomed to the trading interfaces of various exchanges. Just choose a currency and exchange it, no need to even wait for a withdrawal.
- It doesn’t need to hold the funds of its users.
- Has a lot of coins and tokens – Shapeshift offers more than fifty various cryptocurrencies and Godex has more than 102 cryptocurrencies.
- The price is a lot higher than on regular crypto exchanges. Shapeshift exchanges its coins and tokens according to the current fixed market prices, plus their own surplus, to make profit.
- Sometimes certain pairs are not available because the exchange runs out of coins, and users must wait until these coins get replenished.
- A small liquidity pool of the exchange is for small retail buyers, not for large amounts, so you can’t exchange millions worth of assets here.
Hybrid crypto exchange
By “hybrid” we mean the combination of the security of decentralized exchanges and the usability of centralized ones, and this can be achieved in many ways. For example, an exchange can match orders of its users off-chain and update their balances right after they submit the transaction to the blockchain. Or it can provide a high-quality security system that matches the security of decentralized exchanges, so user funds could be as safe as it would be in their own wallet. Among these exchanges we can name EXMO, CEX, and Bitstamp. EXMO was founded five years ago and it hasn’t ever been hacked. It provides high security to its users and is convenient to use. CEX is an exchange by a well-established cloud mining provider who concentrates on its users’ security. For those who want to try trading on a hybrid exchange, Bitstamp has a very high volume and liquidity.
- High security. All funds are stored in cold storage, protecting users’ funds even in the hypothetical situation that the exchange gets hacked.
- Two-Factor Authentication is available for all users. This feature ensures the funds protection by adding another authorization linked with user’s mobile phone.
- These types of exchanges are never easily hacked. In five years, only Bitstamp was hacked via social engineering with its employees and customers were immediately refunded. EXMO and CEX have never been hacked.
- Available fiat deposits. Most hybrid exchanges accept wire transfers from many countries. EXMO supports SWIFT and SEPA transfers.
- Some of these exchanges offer many coin and token pairs for trading, there are 101 various currencies on EXMO.
- Protection against DDOS attacks. The use of special Cloudflare software and high load servers allows it to stay online all the times.
- The volume is somewhere between centralized and decentralized exchanges: $25 million in the last 24 hours on EXMO, $12 million on CEX. That’s not enough for a large crypto whale, but there’s a sufficient liquidity for whales operating with hundreds of thousands of dollars.
Here is a comparison table that will show you the difference of all types of exchanges.
|Number of assets||High||Moderate||Low||High||High|
|Coin holder||Exchange||User||Exchange||User||User or exchange|
All these types of exchanges are different as we can see it now, each offering their own advantages and disadvantages. Some people would like to be anonymous and exchange their crypto via decentralized exchanges, while others simply don’t trust the centralized ones and want to control their coins. Some people prefer usability over security and choose the most popular exchanges, such as Binance.
There are a lot of options to choose from, but remember that a wrong choice sometimes may lead to a loss of funds. We still remember that Mt Gox lost 850,000 BTC that belonged to its customers. So it’s important to always look at the security aspects of any exchange and decide if are you ready to handle it on your own and try a decentralized one, such as IDEX, or use some of the already mentioned exchanges that have cutting-edge security, such as EXMO or Coinbase. It’s up to you to choose which one is best for you. Anyways, it’s likely that soon insecure exchanges will be pushed out of the market by competitors, only those who care about their customers will be left. And that will be great.
Thanks to the Howtotoken Agency experts for the information and comments provided for this topic.