Cryptocurrency exchanges are online platforms that allow people to buy, sell, and trade cryptocurrencies. Most investors also use exchanges as a place to store their crypto and track prices. There are hundreds of crypto exchanges, and their functionality, fees, and features can vary greatly.
What are cryptocurrency exchanges?
Many investors who want to buy cryptocurrencies need an on-ramp—a way to turn fiat currency (e.g., U.S. dollars) into cryptocurrencies. Often, new crypto investors will start with a crypto exchange that lets them use a debit card, credit card, or bank transfer to fund their account. Once their money is in the crypto exchange account, they can buy different types of cryptocurrencies, exchange one crypto for another, or sell their crypto and withdraw dollars.
All crypto exchanges help facilitate the movement of crypto coins and tokens, but their ease of use and features can differ. For example, exchanges may support various types of cryptos, have different user interfaces, and even offer other products and services, such as cryptocurrency credit cards and trading of non-fungible tokens (NFTs)—digital certificates of ownership of videos, art, and gaming items.
Crypto exchanges broadly fall into two categories—centralized exchanges (CEXes) and decentralized exchanges (DEXes). With a centralized exchange, investors create an account, and the platform acts as an intermediary between buyers and sellers. A decentralized exchange is more like a peer-to-peer platform that doesn’t require a login.
Understanding centralized and decentralized cryptocurrency exchanges
The specific differences between crypto exchange platforms can be important when deciding where to open an account or which platform to use. But a broad overview of centralized and decentralized exchanges is a good place to start.
Centralized crypto exchanges
Companies create and run centralized exchanges (CEXes), and they can be an appealing option for investors who want an easy way to buy and sell cryptos. These include big-name exchanges, such as Binance, Coinbase, Crypto.com, Gemini, and Kraken.
Large exchanges can offer user-friendly interfaces, fixed fees, fast order processing, and the ability to use fiat currency to place orders. For many people, buying crypto on a CEX is their first step into the crypto ecosystem.
However, the exchanges may also require users to create an account, verify their identity, only offer certain cryptos, and limit what users can do based on local or national regulations. Centralized exchanges also use custodial crypto wallets, meaning they hold the private keys needed to access the crypto. As a result, a customer’s crypto and the personal information used to open and maintain the account could be at risk if the exchange is hacked.
Some centralized exchanges purchase insurance or may cover customers’ lost funds if there’s a hack, which could help offset the risk. For example, hackers stole over $30 million worth of coins from Crypto.com in January 2022, but the company said, “No customers experienced a loss of funds.” However, investors should be wary of fraudsters because these protections won’t necessarily help customers who fall for a scam.
Decentralized crypto exchanges
Decentralized exchanges (DEXes) are basically programs that run on auto-pilot to allow two parties to securely exchange cryptocurrencies. While they’re not as widely used as CEXes, billions of dollars worth of cryptos exchange hands every week on popular platforms like Curve, PancakeSwap, Sushiswap, and Uniswap.
A DEX can be appealing because users don’t need to create an account or verify their identity to buy, sell, or exchange crypto. The DEX also doesn’t take custody of users’ private keys, which gives investors complete control over their funds—but that also means investors have more responsibility. Losing a private key could mean the linked crypto is lost forever. A DEX might also be one of the few ways to buy new or obscure crypto coins or tokens.
But DEXes might not offer a sleek interface or customer service like one might get with a CEX. Orders can also take a long time to process if the exchange doesn’t have a lot of trading volume. And DEXes don’t accept fiat currencies—someone has to already have crypto to use the DEX. Also, while someone can’t hack a DEX to get a user’s private key, hackers have exploited vulnerabilities in DEXes’ code to steal funds.
CEXes and DEXes: How they’re similar and different
Centralized and decentralized crypto exchanges both facilitate the transfer of cryptocurrencies, but there are important differences to consider when deciding where to trade.
Who runs the exchange
- How they’re different: For-profit companies create and run centralized exchanges. Groups may make decisions about changing a DEX, but it largely runs on autopilot and is powered by a decentralized network of computers.
Creating an account
- How they’re different: A CEX may require users to create an account and verify their personal information to comply with know-your-customer and anti-money laundering laws regulations. DEXes don’t require accounts.
- How they’re similar: Most exchanges support the big-name cryptocurrencies, such as Bitcoin and Ethereum.
- How they’re different: CEXes accept fiat currency, but DEXes usually don’t. DEXes may allow investors to trade lesser-known cryptocurrencies, while CEXes may have more limited options.
Who holds the private keys
- How they’re different: CEXes use custodian accounts and hold the private key associated with a crypto wallet. When using a DEX, traders connect their crypto wallet but never share their private key.
Types of trades
- How they’re similar: Both CEXes and DEXes let people buy, sell, and trade cryptocurrencies.
- How they’re different: Some centralized exchanges offer more advanced types of trades, such as stop-limit orders, which generally aren’t available on DEXes.
- How they’re similar: There’s usually a fee for buying, selling, and converting cryptos on both.
- How they’re different: CEXes tend to charge a trading fee that’s a percentage of the transaction amount and can depend on the payment source (e.g., bank account or credit card), order value, and type of transaction. DEXes’ fees can depend on the platform and current blockchain network fees (so-called gas fees), which can vary based on how complex the trade is and the network’s current capacity.
Regulations and consumer protections
- How they’re different: The for-profit companies that create and run CEXes may have to comply with applicable regulations, purchase insurance, and have support staff to help users. DEXes are largely unregulated and autonomous.
The bottom line
Cryptocurrency exchange platforms are an important part of the crypto ecosystem that allow people to buy and sell cryptos, and trade one type of crypto for another. Investors who want to hold onto their private keys and purchase lesser-known tokens might prefer trading on a DEX. But centralized exchanges are more popular and their ease of use and acceptance of fiat currencies makes them more appealing to people in their first foray into crypto.