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What is a Cryptocurrency Exchange?

The clue to what a cryptocurrency exchange does is in the word exchange, as a cryptocurrency exchange is a service that allows you to perform one of three basic currency exchanges:

Exchange regular money (dollars, euros, yen etc) for cryptocurrency
Exchange cryptocurrency for regular money (dollars, euros, yen etc)
Exchange one cryptocurrency for another

You can compare what a cryptocurrency exchange does to a Foreign Exchange service, like you see at an airport. The Forex Service will have a board of exchange rates for common currency pairs such as Euro-US Dollar (EUR/USD) or British Pound-Canadian Dollar (GBP/CAD), which show the fluctuating value of one currency in relation to another. You can exchange currencies on the spot, paying a commission for the service.

A cryptocurrency exchange offers a very similar service (though entirely online) facilitating the swap of your local currency for a specific cryptocurrency, based on similar sets of Currency Pairs e.g. Euro-Bitcoin (EUR/BTC), which, just like the Foreign Exchange board, shows the current exchange rate for those two currencies.

The Centralised Exchange (CEX)

Once you have created an online account with a Centralised Exchange and passed KYC you can deposit fiat and exchange it for crypto. The actual exchange process is entirely anonymised, in fact you have no sense that there is a seller at the other end of the process as the exchange automatically matches buyers with sellers.

Inexperienced exchange users will almost certainly take the Spot Price with many exchanges targeting that group by boiling down the buying process to a very simple widget – add card details, spend X, receive Y – with the same simplified approach for selling and exchanging crypto.

Of course not all cryptocurrency exchange users want to buy on the spot, traders want the flexibility to buy/sell/exchange based on their own ideas of where price is moving which is why there is a simplified widget style experience for newbies and a very different view for traders with charts, indicators and live trading information. As a beginner don’t make the mistake of trying your first cryptocurrency exchange using a trading view as it is a bit like jumping into an F1 cockpit after just receiving your driving license.

ros

Allows you to exchange fiat for crypto
Allows you to sell crypto for fiat and withdraw back to your bank
User experience is simplified for newcomers & complex for traders

Cons

You have to provide personal information (KYC)
The exchange controls your crypto funds, not you

Top 6 Centralised Exchange (CEX)

The Peer-to-Peer Exchange (P2P)

A Peer-to-Peer Exchange, sometimes abbreviated to P2P, fulfils the same basic function of cryptocurrency exchange, but in a much more focused way than a Centralised Exchange, removing the range of trading tools and simply connecting a buyer with a seller for a distinct single transaction. Think of P2P being about person-to-person transactions.

The process is very similar to eBay, as customers deal directly with merchants and the P2P Exchange plays the role of the middleman, holding funds until the trade has been executed satisfactorily and mediating in case of any disputes. P2Ps don’t have the automated trading engines of a CEX, instead each merchant offers a Spot Price, range of payment methods and a trading limit at that price. Merchants have ratings, just like eBay, so customers choose them based on that combination of factors:

Price offered
Range of payment methods
How much/little they are willing to trade at that price
Their Rating & number of previous transactions

In the early days of crypto P2P exchanges functioned without the KYC requirement and so were popular for users wanting to cash out their Bitcoin, in some cases literally, with physical cash exchanged in person, once the bitcoin transfer had been confirmed.

Pros

One-on-one process with more flexibility on payment methods
Offer a more localised service

Cons

The exchange process is slower
KYC is still generally required
Greater risk of something going wrong

Top 6 Peer-to-Peer Exchange (P2P)

In any other industry the word ‘Centralised’ is assumed, because that is how our economy/society work. So we don’t talk about Centralised Supermarkets or Centralised Mobile Phone Networks. In the world of crypto, decentralisation is a defining property so the distinction is necessary.

The CEX and P2P models are centralised by necessity as they involve fiat money and therefore require interaction with traditional banking (with its associated regulation) and require staff/process to deal with all the inevitable customer issues that arise.

Decentralised Exchanges operate solely in the crypto realm, enabling the exchange of one crypto for another, facilitated by decentralised blockchains and applications built on top of them. They are what happens after the on-ramp and before the off-ramp, never touching fiat,Not only does this remove the regulatory requirement for KYC, but means the full power of decentralised systems – blockchains – can be leveraged.

Decentralised exchanges are the crypto purist’s preferred form of trading/transfer as users have more control of their funds, and there is no need to create a formal account. You just connect your browser wallet like MetaMask, with a single click, then choose the Currency Pair you want to exchange or leverage in some other way.