As cryptocurrencies become massively popular, people start to invest in them through the traditional process of buying and selling. The place where they buy and sell cryptocurrencies is called a crypto exchange. Due to such massive popularity, the number, as well as the types of crypto exchanges, is constantly growing. Some of them take the form of centralized crypto exchanges, some are decentralized, and investors can also rely on a hybrid crypto exchange (HEX).
Here we are going to explore the characteristics of those three types of crypto exchanges and find out why a hybrid crypto exchange is the most reliable place for you to do crypto businesses.
How Does a Crypto Exchange Work?
Before delving into the three different types of crypto exchanges, it might be necessary for you to understand how a crypto exchange works. In the simplest terms, a crypto exchange in the digital currency system works quite similarly to how a forex exchange market works.
At a crypto exchange, you can buy and sell cryptocurrencies within a similar system (such as trading Bitcoin with Bitcoin) or across different systems (such as between Bitcoin and Ethereum). It is similar to exchanging USD with GBP in a forex exchange market.
Like forex exchanges, crypto exchanges can also use one of three types of management structure: centralized, decentralized, or a combination of both. With this analogy, it should be easy for you to understand how a crypto exchange works, especially if you are new in the crypto business.
What Is a Centralized Crypto Exchange (CEX)?
Every cryptocurrency transaction involves at least two main parties: buyers and sellers. In a centralized crypto exchange system, a third-party entity, which is usually a trusted company, steps in to facilitate the transactions between those two parties.
For a certain amount of fee, this company acts as an intermediary who provides a platform and assistance to buyers and sellers so that their transactions occur more efficiently, easily, and cost-effectively. In a highly volatile cryptocurrency ecosystem, the fast and efficient transaction is essential because you can reap potentially big profits if you can exploit the volatility by ensuring efficient transactions.
In addition to assisting in crypto trading activities, the company also sets certain rules that prevent potential vices, such as money-laundering activities, from occurring in the exchange.
Because a company controls and manages a centralized crypto exchange, it will keep traders’ assets and do all the buying and selling activities for them. Traders who have to entrust their assets to this company thus have to create a hot wallet that is connected to the internet and accessible by a trusted company.
The Pros and Cons of Centralized Crypto Exchange
Based on the explanation above, you should be able to get a grasp of the advantages and disadvantages of using a centralized crypto exchange. On the positive side, you can ensure efficient transactions and expect more predictable outcomes (profits or losses) from your trading activity. You can also rest assured that only normal and legal transactions take place in the exchange.
The cons, however, are also quite apparent. Entrusting crypto assets to a third-party entity carries its risks. If you cannot evaluate your broker’s credibility and integrity, you can never make sure whether they are a helper whom you can rely on. Besides, using a hot wallet too frequently is also inadvisable because hot wallets are always prone to hacking. In reality, the majority of crypto hacking cases take place in centralized exchanges.
What Is a Decentralized Crypto Exchange (DEX)?
In a decentralized crypto exchange, there is no third-party broker that meddles too much with the transactions. The exchange only provides traders with a routing layer without giving them any kinds of trading facilities. All transactions occur purely peer-to-peer between buyers and sellers.
The Pros and Cons of Decentralized Crypto Exchange
A decentralized crypto exchange aims at reverting crypto trading activities to their root based on the original cryptocurrency philosophy which maintains decentralization, anonymity, and transparency. The advantages of this mechanism are thus comparable with the advantages that cryptocurrencies originally promise.
When you do crypto trading at a decentralized crypto exchange, you don’t have to create a risky hot wallet, you don’t have to entrust your digital assets to a potentially unknown intermediary, and you can keep your transactions anonymous. The risk of your wallet being hacked is practically nonexistent and you can do all kinds of transactions, including malicious ones, with no trouble because there is no KYC to worry about.
The disadvantages of using DEX are also present. Without assistance, trading activities may occur longer and more complicated. If you want to exploit cryptocurrencies’ volatility, this inefficiency will hurt you very much. A decentralized crypto exchange is also more suitable for seasoned crypto traders with sufficient assets because the exchange doesn’t facilitate the purchase of cryptocurrencies using fiat money.
What Is a Hybrid Crypto Exchange (HEX)?
A hybrid crypto exchange offers a more flexible approach for traders to either use or not use an intermediary in their transactions. It is a combination of centralized and decentralized crypto exchanges. Its establishment aims to mitigate all the disadvantages of both exchanges while harnessing their respective strengths.
Why Is a Hybrid Crypto Exchange Your Best Place to Do Crypto Trading?
There are several reasons why you should rely on a hybrid crypto exchange (HEX) when performing crypto trading activities.
Firstly, it ensures efficient and real-time services typical of a centralized exchange, but also compliant with the core philosophy of blockchain technology.
Secondly, at this exchange, you can choose whether to do your trading activities on a centralized or decentralized platform. You can even do some of those activities on a centralized platform while doing other activities on a decentralized one. This exchange thus offers the best solution if you don’t want to put all your eggs in one basket.
Thirdly, a hybrid crypto exchange (HEX) protects your privacy and anonymity, but it also maintains a regulation that keeps all transactions legal.
And lastly, although you receive all the necessary assistance to do trading activities, you hold full custody of your crypto assets. You neither have to use a hack-prone hot wallet nor have to entrust your assets to your broker. The exchange safeguards your assets in a cold wallet not connected to the internet.