Cryptocurrencies are digital currencies created by solving complex mathematical equations. They are stored in a digital ledger called a blockchain and decentralized, meaning that no government or central authority controls them.
Cryptocurrencies have no physical form and cannot be held in your hand, but they can be exchanged for goods and services. The most common cryptocurrencies are Bitcoin, Ethereum, Litecoin, Monero and Dash.
You need to resort to cryptocurrency exchange platforms for crypto trading and conversion. A crypto exchange is a digital marketplace where you can trade cryptocurrencies for other cryptocurrencies or fiat currency.
What Are Different Types of Crypto Exchanges?
You can divide crypto exchanges into four basic categories: fiat, peer-to-peer, over-the-counter (OTC), and decentralized. Each type of crypto exchange has its pros and cons, so it’s essential to pick the right one for your needs.
The most popular type of exchange is a fiat one (also called a centralized or traditional exchange), which allows you to purchase cryptocurrencies with fiat money both online and at physical locations such as convenience stores or bank branches.
Centralized exchanges are operated by a third party and are most vulnerable to hacks. They are also not registered with regulators, so their security protocols can vary greatly. One of the main advantages of centralized exchanges is that they’re more user-friendly and offer a wide variety of cryptocurrency trading pairs that can be accessed through an app on your phone or computer.
The biggest downside to centralized exchanges is that you’re trusting them to keep your coins safe, which doesn’t always happen! Some people prefer decentralized platforms (like Tezos) because they don’t have any single point of failure where hackers could gain access to everything held in their network at once.
Decentralized exchanges such as OKX are the exchanges of the future. They’re a trustless way of trading cryptocurrencies, but they’re not as mainstream as centralized exchanges just yet.
Decentralized exchanges are built on blockchain technology and are considered permissionless because they don’t require users to register their identity or undergo a Know Your Customer (KYC) process. In other words, you can trade anonymously—or at least pseudonymously—on these platforms.
Most decentralized exchanges function without a central authority overseeing trades and transactions. Instead, trades are recorded directly on the blockchain ledger via smart contracts containing information about funds being transferred between accounts during any given transaction: who sent how much in what currency where?
Hybrid Crypto Currency Exchange is a mix of Centralized and Decentralized Exchanges. Hybrid exchanges are also often referred to as semi-decentralized exchanges because they allow users to trade on a centralized platform while their funds are stored in a decentralized manner.
The user experience is similar to that of a traditional crypto exchange. Still, all trades are conducted by smart contracts or atomic swaps on the blockchain, which means that your funds are secure from potential hackers or malicious actors.
A peer-to-peer exchange is a decentralized marketplace that matches buyers and sellers of cryptocurrencies. These exchanges function by matching buyers and sellers directly rather than through a central authority.
Peer-to-peer exchanges are available in two primary forms: centralized and decentralized. Centralized options, like LocalBitcoins, allow you to meet with other users and conduct transactions without requiring an account or ID verification.
Decentralized options rely on smart contracts to facilitate trades between users who do not know each other personally (see our guide on smart contracts for more details).
OTC exchanges, or over-the-counter exchanges, were initially developed to trade securities outside traditional stock markets. They allow buyers and sellers to meet directly and make transactions without an intermediary.
For example, let’s say you wanted to buy 100 Bitcoin in December 2017 when the price was around $20,000 per coin. You could have gone through Coinbase or Gemini (the two most popular US cryptocurrency exchanges) using their standard marketplaces to do so—but it would have cost you upwards of $2 million!
Instead of paying that much money upfront for 100 BTC at once, you could’ve used an OTC exchange where buyers and sellers can meet anonymously on either end of the transaction. In this case, your broker would find someone willing to sell those same coins for less than their original asking price—say about $19 per coin—and then place an order through them on your behalf.
Once everything was settled and paid for by both parties involved in this deal (you’d need some escrow service if things went sour), then you’d receive your digital assets within minutes instead of weeks or months like most other cryptocurrencies tend to take when transferring from one place into another.”
Which Crypto Exchange Type is the Best?
Deciding on which crypto exchange type is best depends on your personal preferences. Decentralized cryptocurrency exchanges are more secure than centralized ones. Centralized cryptocurrency exchanges are generally easier to use. OTC (over-the-counter) crypto exchanges have higher transaction limits than regular exchanges, but they’re not as easy to use, and they can be expensive. However, whichever type you choose, ensure that it offers enough liquidity, so you don’t have trouble finding a buyer or seller when you want one.
Different exchanges have different characteristics and business models. Some are centralized, and some are decentralized. Some are hybrid, and some are peer-to-peer. This means that they have different levels of security and privacy to offer customers.
For example, centralized exchanges generally offer more security, but less privacy than decentralized exchanges do; however, peer-to-peer exchanges may be less secure than both of these types because they don’t provide any protections for your funds or your identity.
You need to consider which type of exchange will provide the best experience for your needs before signing up with one particular platform over another one (or using several at once).