How Do Cryptocurrency Exchanges Work?

By Rushali Shome

For those of you who are new to the world of cryptocurrency trading, you may be wondering how cryptocurrency exchanges actually work. While we have already explained to you cryptocurrency trading, in a layman’s terms, it is time to delve a little deeper and explore how cryptocurrency exchanges operate in the market and how one can make use of their services.

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As you know, the market has both centralized as well as decentralized crypto exchanges and the two of them do not work in an identical fashion. This is because both of them are different on a very fundamental level and have quite varying styles of operations.

How Do Centralized Crypto Exchanges Work?

Centralized crypto exchanges like Binance, Kraken, BitFinex and so on, are respectively owned and managed by a single entities that are responsible for overseeing and finalizing all transactions and exchanges that occur on their platforms.

They connect to the traditional financial system and facilitate fiat-to-crypto transfers by accessing one’s bank account.

For their work, they frequently take down personal information to fulfill their KYC/AML requirements and use them, like an intermediary party to make exchanges and transactions possible.

Users register their buy and sell orders and the exchange matches them based on demand, supply and accepted price point.

For the services it renders, the crypto exchange usually charges a transaction fee. Different exchanges have different interfaces and ways of charging transaction fees: from the buyer, the seller, on a maker-taker transaction model and so on.

How Do Decentralized Crypto Exchanges Work?

Decentralized crypto exchanges, as suggested by their very name, do not have a central authority to mediate between buyers and sellers and facilitate the exchanges.

Instead, these exchanges give the entire control of handling their transactions and exchanges to the users themselves, and uphold the premise of decentralization so fundamental to cryptocurrencies themselves.

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These exchanges function as peer-to-peer platforms, where buyers and sellers directly confluence, buy and sell.

Often escrow services are provided by these decentralized cryptocurrency exchanges. They might be slightly harder to navigate for crypto newbies but the amount of privacy and anonymity it grants to users is worth a great deal of trouble.

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Rushali Shome

Rushali Shome is a history undergraduate with a keen interest in puns, politics and beyond. When not typing away furiously in the “Notes” section of her phone, she can be found trying to catch the eye of servers at restaurants or weddings for a second helping.

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