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What is a Cryptocurrency Exchange?

Jul 20, 2021
cryptocurrency exchange

As a professional white-label exchange provider, we aim to expand upon every characteristic of cryptocurrency exchanges; main types of exchanges, their strengths and weaknesses. We initially embarked on a more technical approach on exchanges, diving into specific attributes such as custody, security, latency and fees [1]. We also looked into their functionalities – lending/borrowing, liquidity providing, derivatives offerings, and more [2]. 

After reviewing some feedback and carefully analyzing the available knowledge on digital asset exchanges, we feel it is time to re-discover exchanges with a more holistic mindset. We want to display a solid overview both for those just entering the digital asset space, as well as for those that want to enhance their understanding of cryptocurrency exchanges. It is therefore imperative to first introduce what exchanges are. 

Defining exchanges

At its core, an exchange  (noun) is the act of giving one thing and receiving another in return. In today’s evolved world we can think of a classic and daily example for this: buying a good (thing one) with money (thing two). Historically, and before the existence of money, those cases involved barter transactions [3], where two goods were transacted with no -cash- intermediary. Nowadays, exchanges are the digital or physical places where things are traded. Simplistically, they are marketplaces that enable the transfer of goods.

We interact with a number of exchanges throughout our daily lives. From Amazon and eBay to the London Stock Exchange, to buying electronic goods and selling stocks. 

What do exchanges look like in the blockchain space? 

Cryptocurrencies were born from an ethos of decentralization, and as such, weren’t initially accepted by institutions that live within the traditional financial centralized ecosystem. If a user that holds a checking account researches the financial product available by the bank, they will not see cryptocurrencies as possible offerings. Therefore, new venues such as cryptocurrency exchanges were created to access this new digital asset class. 

Overview of exchange types: CEXs and DEXs

Within the financial industry -more specifically the digital asset space-, exchanges can be categorized into centralized and decentralized exchanges. Brokers, cryptocurrency funds and traditional centralized cryptocurrency exchanges (CEXs) form part of the first category. Alternatively, decentralized exchanges (DEXs) form part of the second one. Both provide a trading venue that allows for buying and selling of digital assets, while taking commission from the service. However, the conceptual role that each represents could not be further apart from each other. 

Centralized exchanges are run by organizations that oversee their day-to-day operations such as (technical) maintenance, security, and growth. They provide the infrastructure and take full custody of users’ funds. Conversely, decentralized exchanges provide the infrastructure but allow for peer-to-peer transactions, which means that funds never touch the third-party (exchange) wallet.

How are tokens transacted within cryptocurrency exchanges?

The way transactions are carried out vary depending on the type of exchange used. 

CEXs take hold of users’ funds in a similar manner as banks. While the funds belong to a user, they don’t have possession, but access to them. Therefore, transactions in CEXs are settled internally through centralized order books, while balances are UI settled and displayed to users. It is only after a user withdraws the funds from the exchange that they regain possession of them.

Alternatively, DEXs are a series of linked smart contracts that enable users to trade digital assets without having to grant the custody and security of their funds to a third party. Smart contracts act as the ungoverned intermediaries that match orders to liquidity pools instead of trading against other people [4]. For a wider overview of the differences between CEX’s and DEX’s, you can read our article here

Scalable Digital Asset Exchanges

Scalable Solutions is a power-hub based in Switzerland that offers white-label exchange technology solutions. Besides centralized exchange software, Scalable is developing a decentralized exchange for the users that require these specific venues. As we continue to explore the main aspects of exchanges, it will become clear that we have an unmatched product equipped with the most sophisticated tools in the industry. 

We have a track record of proven excellence through SLAs and trillions of dollars processed through flagship split-of-a-second transactions. 

Schedule a demo with us to access leading digital asset exchange infrastructure.

 

 

 

 

References

[1] “Exchanges: Centralized v Decentralized .” Resources, Scalable Solutions, 26 Oct. 2020, http://scalablesolutions.io/news/centralized-vs-decentralized-exchanges/

[2] “Digital Asset Exchange: Main Functionalities .” Resources, Scalable Solutions, 7 Dec. 2020, scalablesolutions.io/news/digital-asset-exchange-main-functionalities/

[3] “A barter transaction involves two parties and is one where one basket of goods and services is exchanged for another basket of different goods and services without any accompanying monetary payment.” OECD. Glossary of statistical terms. https://stats.oecd.org/glossary/detail.asp?ID=181 

[4] “Smart Contracts and Their Characteristics.” Resources, Scalable Solutions, 7 Apr. 2021, scalablesolutions.io/news/smart-contracts-and-their-characteristics/

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