According to CoinMarketCap, a company that tracks crypto exchanges, there are more than 524 exchanges globally. In this article, we will look at what exchanges are, how they work, and how to find a good one.
Crypto exchange for beginners
A cryptocurrency exchange is a financial services company that makes it easy for people to buy, store, and sell cryptocurrencies, like Bitcoin and Ethereum. A good way to look at an exchange is to compare it with a stockbroker like Schwab and Fidelity. Investors and traders go to these brokers to buy, store, and sell stocks.
You can use an exchange to buy cryptocurrencies with fiat currencies like the US dollar and euro. They also make it possible for people to swap cryptocurrencies. For example, you can easily convert Bitcoin to Solana or Cardano to Litecoin.
Types of crypto exchanges
Broadly, there are two main types of crypto exchanges: centralized and decentralized exchanges. A centralized exchange is a company that is owned and managed by a corporation or a single entity. This authority can be the company’s founder or an appointed CEO.
There are several types of centralized exchanges. For example, there are peer-to-peer exchanges that make it possible for people to trade coins among themselves. They create a safe space with an advanced escrow feature.
There are other exchanges that provide crypto derivatives like leveraged tokens and perpetual futures. Other companies focus on spot prices.
Second, there are decentralized exchanges (DEX). A DEX is a company that enables peer-to-peer transactions in a non-custodial manner and without an intermediary. These firms replace the middlemen using software known as “smart contracts.” DEXes are more transparent than centralized exchanges.
Another key difference between CEX and DEX is that in the latter, decisions are made by token holders through a public voting process. Further, DEXes don’t require user registration and don’t have customer care representatives.
How crypto exchanges work
Centralized exchanges like Coinbase and Binance work by matching crypto buyers and sellers. Most exchanges list thousands of cryptocurrencies like Bitcoin, Chainlink, and Solana. They use order books, which are an electronic list of buy and sell orders that is organized by their prices.
As a crypto buyer, you just need to visit the exchange’s website, create an account, select the coin you want to buy, and then execute the trade. After that, you can decide whether to store them in the exchange or in an external wallet.
Decentralized exchanges use different approaches. Most of them, like Uniswap use an automated liquidity protocol that is powered by a smart contract. Uniswap’s smart contracts are Ethereum, Polygon, Optimism, Arbitrum, and Celo. Each of the smart contracts manages a liquidity pool made up of reserves of two ERC-20 tokens.
With a DEX, anyone can be a liquidity provider by depositing tokens in the network and then earning returns from it. DEXs charge a small fee, which they then split between the people who own their tokens and the people who provide liquidity.
What to look for when finding a good exchange
First, ensure that it has a good track record with its past clients. A simple Google search can provide this information for free. Second, look for its security features and whether it has insurance. Further look for the quality of its customer service, the amount of money it charges for transactions, and the number of coins it offers.
In this cryptocurrency exchange for beginners article, we have explained what an exchange is and how they work. We have also assessed some of the top things to look at when signing up for an exchange. After the collapse of companies like FTX and Voyager Digital, it is important to do more due diligence before you deposit your funds.
Article by Born Realist