What are the different types of crypto exchanges?

March 31, 2019 | by David Kariuki


The number of cryptocurrency exchanges keeps on increasing as innovation in the crypto space pushes on. These exchanges can be categorized in terms of the way trade takes place either directly between traders or indirectly between them through order books.

Other categorization relies on the nature of platform, for instance whether it's a brokerage or not; and the nature of transaction or trade, whether it allows trading of cryptocurrencies only or fiat too.

Cryptocurrency exchanges can be sub-divided into decentralized and centralized exchanges as the main categorization. Essentially, a centralised exchange is an exchange run by a company. The company has a CEO and employees - a traditional structure.

A decentralised exchange, however, is not run by anyone. There is no company, no CEO, no employees. The exchange runs off the blockchain technology and is often (but not always) controlled in a fully democratic manner. The users, i.e. you and me, control the future direction and decisions of the exchange.

That said, here is a list of type of cryptocurrency exchanges: 

Based on nature of transaction/trade 

1. Fiat-to-crypto exchanges: Fiat-to-crypto exchanges, as the name goes, facilitate trading to let users exchange fiat to crypto or vice versa. For instance, you can buy Ethereum or Bitcoin with U.S. dollars or Euros. Until recently, it was not easy to buy many types of crypto with fiat. Most crypto exchanges allowed the buying of Bitcoin first and then a user could change Bitcoin to their preferred crypto. 

However, it's now common place to find cryptocurrency exchanges that offer direct pairs for altcoins and dollars or fiat although support for majority of pairs is still missing. 

In other words, for most crypto/altcoins, there is no direct fiat-altcoin exchange and you still must buy a popular crypto with fiat first and then exchange the crypto to your preferred coin either on the same exchange or on a different one. 

Most exchanges that allow users to buy crypto for fiat through Visa/MasterCard, bank accounts and therefore integrate with these systems. Good examples in this category are Coinbase, Changelly, Coinmama and CEX. 

Because most people buying crypto for the first time buy it by fiat, these exchanges are most popular with people who are entering crypto for the first time and they allow for easy access of their choices without lots of hassle. 

Most of the crypto-to-fiat exchanges are centralized meaning they are not even based on blockchain but rather websites and apps etc that facilitate these natures of trades. But there are blockchain-based models that tend to use smart contracts to incorporate fiat orders inside of crypto-to-crypto exchanges such that these types of orders can be placed and filled automatically when a counterparty is found or without need for counterparty for some others. No doubt that in future, it would be possible to do fiat-crypto exchanges on smart contracts and in real-time. 

2. Crypto-to-crypto exchanges: These types of exchanges allow users to buy one crypto using another one without having to first go the fiat exchange way. A popular word for this category is crypto swapping because there is a direct exchange crypto for crypto. 

These days, also, technology such as atomic swap allows users to exchange at near-instant terms and it can work off-chain. With some exchanges, you do not even have to find counterparty to swap coins with because they connect to other liquidity providers. 

A user is able to place the order and have it fulfilled instantly by the platform even if there is no person who has placed that nature of order. 

This leads into another variant of crypto-to-crypto exchanges: one that works with counterparty system. A user who needs to buy certain crypto places an order on the platform and the system searches and matches the order with a sell order placed by a different user who needs the same crypto on the demand side. If there is no matching order in this case, there is no guarantee that the order will be fulfilled, or it may stay for some time without being fulfilled (therefore traders are always looking for great liquidity to trade easily).

Examples in this category include: Poloniex, Bitstamp, Coinbase, KuCoin, Bitrex, Binance, etc. 

3. Peer to peer exchanges: Peer-to-peer exchanges are those in which the nature of trade is that the exchange takes place directly between a buyer and a seller without a middleman even though the platform itself acts as a connecting layer between the two. 

The word peer to peer is not a new one or particular to these exchanges because cryptocurrencies are meant to be peer to peer in that they are allow direct exchange of value between two or more users without all the costly brokerage, middleman processes and methods or third parties.

These exchanges can either be websites, apps or dApps that match a buyer’s need to a seller’s need and allow the party to exchange value. An example is Localbitcoins where users can place orders that are then discoverable by buyers and the two can then exchange value via an escrow service. They are characterized by very low transaction fees. 

4. Brokers: Most brokers allow you to purchase the cryptocurrency but you do not take complete control of the private keys for asset even though most are regulated and act in good faith with the role of facilitating the transaction or exchange of the value between parties. The product is packaged as a CFD or other product based on contract between you and the company. The owner of the asset gets the difference as profit from the transaction based on the contract. 
In some cases, there is no real exchange of the underlying crypto-asset since the contract constitutes a bet for the direction the price will go and the difference is settled in the owner’s account at the end of the contract. Good examples include eToro Or 24 Option. Essentially, they allow you to gain exposure of crypto markets without having to worry about the technical aspect of managing it. 

Based on the nature of the trading platform
5. Centralized exchanges: The best way to understand centralized exchanges is by seeing them as not based on blockchain or using smart contracts. Not only are they owned by a central organization but also that there is no network of miners or users confirming these transactions. 

A centralized exchange acts as an intermediary to facilitate trading between two more than acting as a platform that connects traders directly. A transaction completes when buy orders and sell orders are matched in an order book. That means a centralized exchange will have to hold user’s keys to facilitate the transaction. 

6. Decentralized exchanges: A decentralized exchange in most cases allow peer to peer exchanges and may therefore double as a peer-to-peer exchange. Examples in this category include Shapeshift.io which also facilitates instant crypto-to-crypto transactions. In most cases, users are under control of their keys until the exchange happens. 

If you’re interested in digging deeper in different exchanges and what the offer, check out this great resource on cryptocoindude.com - best cryptocurrency exchanges for trading cryptocurrencies.


David Kariuki

David Kariuki is a freelance tech journalist who is passionate and excited about tech issues that affect society on a day to day basis. He has long term experience of tech and fintech writing and still writes widely about a variety of tech topics including blockchain, AI, OpenSim and virtual reality.David is currently pursuing a MSc in Environmental Management at Open University. He is a current blockchain writer on the popular UK cryptocurrency blog cryptocoindude.com.