The crypto economy is vast in terms of service providers, applications, coins and total market cap. Crypto exchanges play a central role and provide important services to people all over the world: they are the on- and off-ramps for crypto, and the marketplace where prudent traders have a fair chance of realizing gains.
The crypto and Bitcoin space is always evolving and with it new business models and services are developed by crypto exchanges. They take a leading role in pushing the industry forward, relentlessly seeking new ways to unlock potential and drive adoption.
There are many different types of crypto exchanges, serving traders at varying levels of their crypto journeys from first-time buyers who need something simple to the advanced crypto veterans who demand precision and advanced features. Below are the four (and a half) most common types of crypto exchange, and the type of users they usually appeal to.
Peer-to-peer crypto exchanges
The role of a peer-to-peer (P2P) exchange is to facilitate crypto trades directly between users. Traders publish their buy or sell offers, like an ad on Amazon, and others can respond to the offer and negotiate payment and other terms with them directly. Users can often use the P2P exchange as an escrow service, where the exchange holds the coins for one party and releases them when the other party has received payment.
AAX uses the P2P model to serve as the OTC trading desk which provides the fiat on- and off-ramp for users. Traders publish their offers and transfer funds between each other with AAX performing escrow services for both parties. This is how AAX users realize their crypto gains in fiat, and new users access the centralized exchange starting with fiat.
A centralized exchange is the most common type of crypto exchange, it’s where the majority of the retail market moves in and out of crypto and where seasoned crypto traders make their moves. In this category, crypto exchanges distinguish themselves by usability, transaction speeds (like our LSEG matching engine), supported on- and off-ramps (cash, bank transfer, credit card, AliPay), available markets plus the liquidity and market depth of those markets.
Where offers are published onto a listings board on P2P exchanges, centralized exchanges manage orderbooks which record all buy and sell orders – knowing how to read an orderbook is essential for reading the market and making profitable trades.
The term ‘centralized’ refers to the way the exchange is managed. Centralized means that the exchange is owned, built and managed by a central entity. AAX is the entity that builds, operates and maintains the exchange. When customers have questions, AAX is there to help.
Centralized exchanges also tend to be custodial, which means they hold the users’ private keys for them. This makes trading a lot easier and customer friendly, but it also means there is a risk for traders who could lose their holdings if an exchange is hacked. However, it should be noted that with the increased maturity of the crypto industry, crypto exchanges today often reimburse customers out of pocket in the event of a hack, or offer some type of insurance.
As the name suggests, decentralized exchanges are pretty the much the opposite of everything we mentioned under centralized exchanges. They are less commonly used in general and usually only by seasoned crypto veterans. They still operate orderbooks, but it is not managed by a central authority. There is no single entity that is responsible for operating and maintaining the exchange, rather it is carried by a distributed community that often uses voting and worker proposal mechanisms to keep the decentralized exchange going.
Decentralized exchanges use networks and protocols to programmatically transfer funds for direct wallet-to-wallet trading. This means every user holds their own keys, owns their own funds and is therefore also responsible for security and troubleshooting. If there is something you can’t figure out, or you forget your password, there is no customer service team to help. No one has access to your account so no one can reset your password.
That means decentralized exchanges are far more difficult to use, and that is also why only experienced crypto traders who’ve been around the block tend to trade on these platforms. The upside of all this is much higher levels of security. There are no exchange hacks that affect all users, because there is no honeypot where all the funds are kept that hackers can exploit. It’s the same difference as a bank heist and pickpocketing: the former affects everyone at the same time whereas the latter is more opportunistic and aimed at individuals.
Typically, decentralized exchanges only support crypto-to-crypto transfers so they cannot be used as fiat on- and off-ramps. More importantly, due to the lack of greater adoption, most decentralized exchanges have low liquidity which makes it harder to trade at stable prices and market makers are more exposed to major market swings.
Instant exchangers improve on some the usability aspects compared to decentralized exchanges but come with different downsides. They are typically very easy to use and support a wide variety of markets to exchange crypto-to-crypto instantly. All you need to do is enter a trade order and it will be filled right away.
This works because instant exchangers provide a top-level connector service, allowing you to access multiple markets across multiple exchanges at the same time. That’s why it’s instant. However, the speed and convenience comes at a price, or actually, it comes twice at a price. First, you don’t have the ability to buy at lower or sell at a higher price with a limit order – market orders only. Second, the service usually charges a rate-based fee for every transaction you make. The amount varies, but in general these fees are higher than either centralized or decentralized exchanges.
Typically (but not always), within retail centralized exchanges there will be a derivatives exchange section as part of the platform. Borrowing from the world of traditional finance, derivatives are things like futures and options which are appealing to more advanced crypto traders because it enables more sophisticated features like shorting a cryptocurrency.
Secondly, in derivatives markets traders can make leveraged investments. Trading with leverage greatly increases both the upside as well as the downside of the trades you make. Again, this should only be used once you’ve spent considerable time in the markets, reading the charts, performing technical analysis, making gains, suffering losses and perfecting your strategy.
Trade with AAX
AAX is the world’s first digital asset exchange to be powered by LSEG Technology. Offering OTC, spot, and futures, it provides a highly secure, deeply liquid and ultra-low latency trading environment; and a meeting point between crypto and global finance.