How does a Crypto Exchange work? Explained.

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In the last five to six years, cryptocurrencies have been the epicenter of a notable growth in digital assets and their value. As traders started to enter this market it became more and more professional, and many valid crypto exchanges have come to life.   


A crypto exchange is a way for users to have comfortable access to various cryptocurrencies and countless users and liquidity with whom they can interact. An exchange is a fairly simple concept, with obvious complexity in its structure, but ever present in the financial markets, and very necessary for the connection of buyers and sellers, takers and makers. 

Blockchain technology has seen the rise of exchanges who specialise in the cryptocurrency ecosystem, and we want to explore the difference between exchanges who follow a traditional, centralised approach, and others who prefer to take decentralisation into their structure.


Centralised crypto exchanges rely on a central entity to provide liquidity, even though many times users can provide liquidity for certain assets in exchange for rewards; the centralised structure allows for more features and user friendliness in its interface, and can leverage a lot more trust from governments and authorities, as they can see that someone is in charge; this usually means they are compelled to enact KYC regulation (Know-Your-Customer). Centralisation also means higher security violation risks.  Decentralised exchanges usually run on a blockchain, which means users are anonymous and there is lower risk of hacks and attacks; they operate without intermediaries, and usually rely on smart contract technology to put traders in contact.

Both exchanges have one thing in common: they keep custody of your funds, and the wallet you use on the exchange is not yours (more on crypto wallets in our article regarding the topic).
This means that if anything happens to the exchange itself, the funds you kept on it have the potential to not be returned to you. You should always research this, and possibly transfer your funds to cold storage (A private wallet) if you fear this possibility


Before trusting any exchange, you should always DYOR (Do Your Own Research). Reading their policy regarding security and plans in case of a Black Swan Event is always the right call, and you should also follow your position in the market: If you're in the early stages of your crypto adventure , you should probably opt for a mainstream, centralised exchange such as Binance, to then re.-evaluate your options once your expertise deepens.