It is nearly impossible to exchange crypto unless you do it through a third-party exchange or service that offers a large pool of coins at favorable rates. These services are called crypto exchanges and they are currently the go-to place for all investors who seek to transact in the world of blockchain.
Instead of trading from one person to another person like we used to do back in 2011 when Bitcoin was just a fly, these platforms act as the perfect middleman.
After Binance launched back in 2017, literally thousands of copycats have tried to do the same thing without being able to bring the same trust or functionality.
Understanding different exchange platform types
From centralized exchanges to decentralized exchanges, leverage exchanges, and swap exchanges, users have a wide range of options to choose from depending on their preferences and needs.
The most common types of platforms have been divided into the four different categories where user-friendliness, utility, security, and accessibility are the driving factors that separate them.
Centralized Exchanges
Definition and Technical Features
A centralized exchange is the most popular platform today and is usually run by a larger trusted company. Much like banks, these exchanges are here to satisfy customers that want to buy or sell directly from the order book.
These platforms utilize a centralized database to store user data, transaction records, and trading orders whereas most of them are also very easy to use making them perfect for beginners. Additionally, centralized exchanges offer advanced trading tools, including charting tools, technical analysis indicators, and trading bots.
Advantages and Disadvantages
Centralized exchange platforms offer high liquidity, making it easier for users to execute large trades quickly. The number of coins also tends to be high and most of the popular newcomers get listed rather quickly.
However, even though many centralized exchanges are regulated by a government agency, they’ve always been vulnerable to security breaches and hacks.
New users are required to pass over their personal information such as ID cards to tie their identity to their account. This is partly to identify each trader or investor but also to prevent money laundering and unethical behavior. Finally, centralized exchanges are prone to censorship by the central authority, which may limit users’ trading options.
Examples
The most popular centralized exchanges to date are Binance, Coinbase, and Kraken which have all been able to cement a good following thanks to plenty of trading pairs, both advanced and beginner-friendly trading tools, and relatively low entry fees.
Leverage Exchanges
Definition and Technical Features
A leverage exchange platform is a type of cryptocurrency exchange that allows users to trade cryptocurrencies with leverage. A leverage exchange platform is a type of cryptocurrency exchange that allows users to trade cryptocurrencies with leverage. This allows traders to increase their buying power during the course of a trade which enables them to open positions that are 5x, 10x, and sometimes 50x larger.
According to leverage experts at Leverage Trading, most traders who start trading with a leverage crypto trading platform make the mistake of overleveraging. This increases the risk of liquidation which is a complete loss of trading capital. The best way to prevent this from happening is to simply start out with a lower ratio and use a liquidation price calculator to see how close your position is to getting wiped out.
Leverage exchange platforms typically offer margin trading, where users can leverage their positions using borrowed funds. They also provide advanced trading tools, including stop-loss orders, take-profit orders, and trading bots, to help users maximize their profits.
Advantages and Disadvantages
One of the primary advantages of using a leverage exchange platform is the potential to make higher profits compared to regular spot trading. To prevent high trading fees, leveraged trading platforms usually have very low transaction fees. This makes sense considering that the positions can sometimes be 100x larger than normal, which in the end affects the trading fees.
The negative side of leveraging your trades is of course the risk of larger losses if you are not careful and the possibility of liquidation, where the exchange automatically closes a user’s position if their account balance falls below a certain threshold, is also a significant risk associated with leverage trading.
Examples
Some examples of popular leverage exchange platforms include Bybit, Bitmex, and Binance. These platforms offer many advanced trading tools such as derivatives, futures, options, and even leveraged ETFs making them a popular choice even among professional traders.
Decentralized Exchanges
Definition and Technical Features
A decentralized exchange is operating on the blockchain and they don’t rely on a centralized service to confirm trades. They are run by smart contracts to automatically execute trades, giving users full control over their funds and trades. They also offer a trustless type of security and privacy that no other centralized exchange can offer.
Advantages and Disadvantages
The biggest per of using a decentralized exchange is the security and privacy it provides. Because users do not have to submit personal information, the risk of hacking or censorship is significantly reduced.
Additionally, decentralized exchanges offer transparent transactions, making them ideal for users who value transparency. However, the downside is that decentralized exchanges may have limited trading pairs, slower transaction speeds, and the complexity of using the platform.
Examples
Some examples of decentralized exchange platforms include Uniswap, PancakeSwap, and SushiSwap. These platforms use decentralized protocols and automated market makers to enable peer-to-peer trading.
Swap Exchange Platform
Definition and Technical Features
A swap exchange also called an instant exchange, are simple platforms with the primary took being its exchange function. They are designed for simplicity by offering a lightning fast way to exchange from one crypto to another without the need for signing up or registering an account.
Advantages and Disadvantages
The primary advantage of using a swap exchange platform is the ease of use and low trading fees. If you are only looking to swap from Bitcoin to a new exotic altcoin, then these instant exchanges are the way to go. However, the downside is that swap exchanges may have limited trading pairs, and users may be exposed to slippage during high market volatility.
Examples
Some examples of popular swap exchange platforms include Changelly, ShapeShift, and AtomicDEX. New users often find these exchanges easy to use due to their lightweight interfaces.
Comparison of the four types
Key Differences
Centralized exchanges, leverage exchanges, decentralized exchanges, and swap exchange platforms are explored in detail. Centralized exchanges offer high liquidity and advanced trading tools but are prone to security breaches, insider attacks, and censorship.
Leverage exchanges allow users to trade with borrowed funds but may lead to significant losses. Decentralized exchanges offer increased security and privacy but may have limited trading pairs and slower transaction speeds.
Swap exchanges have removed all the fluff and fancy charting interfaces and only offer a fast way of transacting between coins. Choose an exchange based on the needs you have and consider the functionalities that we have listed in this article.
