How a cryptocurrency exchange is working
Every exchange is hosting a list of cryptocurrencies and tokens and generate an address for these assets for their clients. Then the client is able to send (deposit) a number of coins to his generated address.
This way he is able to open a sell order with the desired price either in Bitcoin or in any other coin with which the exchange is providing a trading pair. Usually the most exchanges are offering trading pairs including at least BTC a few other popular cryptos like Ethereum or Litecoin.
An example of trading in a cryptocurrency exchange
For example the client is depositing 1000 digibyte coins and he wish to buy BitcoinZ coins with them. He can create a sell order , buying directly BTCZ if the exchange is offering a DGB/BTCZ pair with the exchange’s DGB/BTCZ exchange rate. Otherwise he has to sell the DGB for Bitcoin and then to set a BUY order , using his Bitcoin for getting the desired BitcoinZ coin of our example.
Asking for a withdrawal
After a trade, the user can take back any coins to his personal wallet for the specific coin type or to his multiwallet, asking for a withdrawal. There are some exchanges which offer trading pairs of cryptocurrencies, especially of the most popular like BTC and ETH, with FIAT currencies like euro and dollars. This way the user can sell any cryptocurrency and get euro, dollars and other printed currencies.
We have to add add that the clients should always be careful to not forget funds in exchanges’ addresses . They should always use their own wallets for storing them. More info about this in the article “How to avoid traps in the cryptospace“.
Furthermore , the potential clients should be always very careful in choosing which exchanges are going to trust for their transactions because the exchanges are not always trustworthy. You can get more information about this in the guide of “Choosing a trustworthy exchange” that will be available soon.
Finally it is important to not confuse cryptocurrency exchanges with cryptocurrency brokerages. Brokerages are platforms that offer leverage for trading cryptocurrencies without necessarily really owning the underlying assets. Quite like the forex brokerages do with the CFD (Contracts for Difference) for the stocks and the FIAT currency pairs
What is a DEX or Decentralized exchange?
We described what is a cryptocurrency exchange above. This is how the most cryptocurrency exchanges function and it is the “Centralized” model for an exchange.
During the last years, another exchange model is appearing : The Decentralized.
But what we mean with this definition ?
We have two types of DEXes
1) The platforms that offer swaps between two different assets by using partnered centralized exchanges for liquidity.
The user in this scenario is getting the desired coin and he is paying with another. He avoids any difficult registration procedures in a Centralized exchange and he hasn’t to monitor any orderbook. He just “swap” an asset into another one. In reality, the platform is just an intermediate between the user and the partnered centralized exchanges that provide the needed assets. The values are depending on the orderbooks of the assets in the partnered exchanges.
For example platforms like Changelly, Shapeshift or Multiwallet apps like Coinomi and Vidulum offer this type of services.
2) The platforms that offer real P2P (peer to peer) transactions between two users. These are in reality the true decentralized exchanges. Here, the users themselves are actually the liquid providers *and* the buyers. The platform just makes the swap between their own assets, based on their orders.
A perfect example of a true decentralized exchange is the AtomicDEX by Komodo.