Cryptocurrency trading is gaining steam, and almost everyone is eager to jump on the bandwagon. But before dipping your toes in the complex world of crypto trading, it is crucial to keep a few things in mind. For instance, it is important to choose the right crypto exchange that suits all your needs in terms of ease of operation, transaction fees, etc.
Like stock exchanges, crypto traders can buy, sell, and convert cryptocurrencies on crypto exchanges. There are currently three types of cryptocurrency exchanges—centralised exchanges (CEXs), decentralised exchanges (DEX) and hybrid exchanges (HEX).
While most trading currently happens on CEXs such as WazirX, Binance, Coinbase, among others, the rise of decentralised finance (DeFi) and related applications (dApps) on blockchains like Ethereum has fuelled the development of DEXs. Some popular DEXs like Uniswap, Pancakeswap, and Compound also witness massive transaction volumes.
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HEXs have been designed to overcome limitations in CEXs and DEXs and are still in their infancy. They aim to combine the best features of both CEX and DEX. Qurrex, Eidoo, and Legalos are some of the hybrid exchanges.
Let’s look at key differences between these exchanges.
What are centralised exchanges?
Centralised exchanges are the most common types of cryptocurrency exchanges and usually have the simple processes and smooth interface. A central entity governs them, typically the owner of the exchange. In CEX, every order is recorded and validated by the company to ensure security and correctness. These exchanges usually offer both crypto-to-crypto trading and use of funds via your bank account or credit card to trade cryptos.
Customer support is one of the important features that most CEXs offer. This is particularly beneficial for those taking their first steps in crypto trading.
However, your funds will remain in a wallet managed by the CEX. Also, the signup process might involve a know-your-customer (KYC) process where some personal details will have to be shared.
How are decentralised exchanges different?
A decentralised exchange as the name suggests is truly decentralised. This means there is no central oversight or no company or institution governing these exchanges. The trades on DEXs are automated and executed via smart contracts and decentralised applications based on certain pre-defined metrics. Most DEXs currently operate on Ethereum blockchain.
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Since no KYC is required, your personal information is safe. DEXs are also more secure provided the smart contracts are written keeping all necessary security checks in mind.
However, the interface may not as smooth as CEXs which may impact transaction speeds and volumes. And with no customer support to fall back on for help, DEXs might prove more useful for experienced traders than novices.
What’s the need for hybrid exchanges?
Hybrid exchanges, as mentioned above, build on the strengths of both decentralised and centralised exchanges. In DEX, users have complete control over funds. For instance, they can either choose to keep a wallet or trade via smart contracts. A hybrid crypto exchange is a platform that provides users with access to their private keys and aims to solve the scalability issues of decentralised exchanges. One of the primary goals of HEXs was also to address the DEXs high trading fees. In HEX trading, there are no taker fees and gas fees.
CEX vs DEX vs HEX at a glance
- Ease of use: CEXs and HEXs score over DEXs in terms of ease of access and operations. DEXs usually have convoluted user interfaces and are hard to navigate, which can be intimidating for new users. CEXs have a very well-defined and easy-to-use user interface, which is welcoming for amateurs and new users.
- Custody of funds:CEX manages your crypto wallet, while you have absolute control over your funds in DEX and HEX.
- Transaction speed:CEXs offer the fastest processing speeds followed by HEXs. DEXs may suffer from some lags.
- Security: DEXs are hosted on decentralised servers which makes them less vulnerable to hacks. HEXs also provide benefits of decentralisation that CEXs lack.
- Legal safeguards:With no single point-of-failure, it is nearly impossible to shut down or regulate DEXs. This can benefit users in countries with a ban on cryptocurrencies. This is also true to an extent for HEXs. CEXs, however, need to abide by the regulations of the country they are located in.
- Privacy:KYC that includes providing your identity proof is mandatory for most CEXs without which deposit/withdrawal of funds is not allowed. DEXs require just an email address.
- Liquidity:CEXs currently have the highest liquidity. HEXs are still in nascent stages, so it remains to be seen how they progress.
Since most DEXs currently operate on ethereum blockchain, the cryptocurrencies you want to trade will remain limited. Also, if you want to buy cryptos using fiat currency then only CEXs and HEXs may allow that. You may want to keep these factors in mind before choosing to begin your crypto trading journey.
Also read:How crypto exchanges are morphing into NFT marketplaces to evade new rules
