A cryptocurrency exchange is an online platform where users can buy and sell different digital currencies, such as Bitcoin or Ethereum. It works like a traditional stock market but the transactions are in cryptocurrencies, a crypto exchange is not just a trading platform, it is a complex ecosystem that uses various technologies to facilitate transactions, security and provide services to the user.
How does a crypto exchange work?
The main function of a crypto exchange is to establish an effective connection between buyers and sellers. The process behind this works in several steps :
Creating a user account : A user first opens an account on the exchange, for security reasons, the KYC (Know Your Customer) process has to be followed. Where the user has to confirm their identity with their ID card or other documents. This helps the exchange prevent money laundering.
Deposit Funds : After creating an account, users can deposit conventional currencies (such as Taka or Dollar) or digital currencies from any other crypto wallet into their account.
Order Book : This is the most important part of the exchange, the order book is a list of all orders placed by buyers and sellers.
Limit Order : The buyer places an order to buy cryptocurrency at a specific price.
Market Order : The buyer places an order to buy cryptocurrency immediately at the current market price, sellers also place their orders in the same way. The exchange matches these orders and when a buyer's order matches a seller's order, the transaction is completed.
Transaction Completion and Settlement : When a transaction is completed, the exchange transfers digital currency from the user’s account to the buyer and fiat currency or other cryptocurrency to the seller. This process is usually completed quickly and automatically.
Fees and Commissions : Exchanges charge a certain fee or commission for each successful transaction. This is their main source of income...
Types of Crypto Exchanges
Crypto exchanges can be divided into two main categories :
Centralized Exchange (CEX) : This type of exchange is operated by a central authority. Exchanges like Binance, Coinbase, and Kraken fall into this category. These exchanges provide easy and fast transactions for users, but one of their major weaknesses is that the exchange retains control of the users’ funds, which makes them vulnerable to hacking.
Decentralized Exchanges (DEX) : These exchanges operate using blockchain smart contracts without any central control, such as Uniswap and PancakeSwap. Here, users trade directly from their own wallets, so they have full control over their funds. This reduces the risk of hacking, but can be a bit more complicated to use than centralized exchanges
