The cryptocurrency market has seen an unprecedented boom, providing new opportunities as well as unique challenges for investors to navigate the burgeoning world of digital assets. Of these pathways, cryptocurrency exchanges are the most popular on-ramp to buy, sell, and trade cryptocurrencies. It’s no surprise then that the world of crypto exchanges can seem intimidating and overwhelming. This is compounded for US residents, who face their own unique regulatory realities and constraints. This post serves as a step-by-step guide to find your way through the crypto exchange maze. Specifically, it aims to explain the different types of exchanges, their pros and cons, and key points to look for when choosing the right exchange for your needs. We’ll cover centralized exchanges (CEXs), decentralized exchanges (DEXs), and hybrid exchanges, focusing on what makes each one special and advantageous. In this post, we’ll dive into the role DEX aggregators play. Their impact on liquidity within the entire decentralized finance (DeFi) ecosystem is very noteworthy. Finally, we will examine specific examples of exchanges, including KuCoin, Kraken, BitYard, eToro, BTCC, Poloniex, Bitfinex, Binance, Uniswap, and Dodo, to illustrate the diverse range of options available to US crypto investors.
Understanding the Different Types of Crypto Exchanges
As we’ve reported here, the world of cryptocurrency exchanges is far from a monolith. It includes several models, with each providing a different strategy on how to help promote the trading of digital assets. The three most popular cryptocurrency exchange types are centralized exchanges (CEXs), decentralized exchanges (DEXs), and hybrid exchanges. Hybrid exchanges – the best of both worlds. Hybrid exchanges take the best features of both CEXs and DEXs.
Centralized exchanges (CEXs) are intermediaries, as they hold users’ funds and control the trading process. These centralized exchanges often provide robust, easy-to-use interfaces, deep liquidity and access to a growing variety of trade-able pairs. First, consumers need to trust the exchange to handle their funds and sensitive personal information. This dependence puts them at risk from malicious cyberattackers and at odds with emerging regulations. Binance, widely considered a CEX fly-by-night, impolitely ignores its customers. Binance is not the only CEX still earning a daily glare of self-evident truth.
Instead, decentralized exchanges (DEXs) run on a non-custodial orderbook. This gives real power back to users, letting them decide what happens to their digital legacy. That’s because DEX removes the necessity of third-party exchanges involved in centralized trading. It is now doing so by introducing a new idea to the crypto exchange space. DEX functions in a non-custodial structure. This requires users to have complete responsibility for their digital wallets and private keys. This removes the danger of losing money due to exchange hacks or mismanagement. Other examples of DEX include Nash, Qurrex, Eidoo, Legolas and more.
Hybrid exchanges are looking to take the best of both CEXs and DEXs. They may offer features such as centralized order books with non-custodial wallets, aiming to provide a balance between user-friendliness, security, and control.
Decentralized Exchanges (DEXs) and DEX Aggregators
As the name suggests, decentralized exchanges (DEXs) are revolutionizing cryptocurrency trading. Unlike their centralized cousins, DEXs cut out the middleman, letting users trade directly with each other through smart contracts. This first layer of disintermediation has a number of benefits, such as providing increased security, privacy, and control over one’s funds.
DEXs present certain challenges. One of the biggest hurdles is fragmented liquidity. Because DEXs are generally standalone, their liquidity gets spread thin across the many different platforms. This dispersion makes it very difficult to carry out large trades without severe slippage. This is where DEX aggregators shine.
DEX aggregators are applications that aggregate liquidity from across different DEXs into one interface. DEX aggregators are able to create platforms that combine asset liquidity pools for liquidity both CEXs and DEXs. Aggregators send trades through the DEX with the most optimal price. This strategy allows users to avoid slippage and amplify their returns to the fullest extent possible. Yet still, DEX aggregators are under fire for creating fragmented liquidity across various DEX platforms. Uniswap is an automated market maker that allows users to easily swap between any two Ethereum assets. You can swap tokens quickly and effortlessly, owing to its diverse liquidity pool. Uniswap needs tokens of the Ethereum network to function and undergo the mechanics of looping exchanges. To ensure the liquidity needed, Dodo leverages its algorithm of Proactive Market Maker.
Key Considerations for US Residents
CryptoExchangeUS faced a unique set of challenges when entering the crypto exchange market. US does not permit users from large swathes of the US including Texas, New York, and other areas.
US exchanges are heavily regulated under, for example, know-your-customer (KYC) and anti-money laundering (AML) laws. Users need to prove their identity and follow strict AML and CTF regulations in order to use exchange services. Failure to comply with these guidelines can lead to account suspension and/or legal penalties.
Geographical restrictions are another important factor. Some of these exchanges aren’t even available in all US states because they cannot comply with the regulatory constraints. Residents of large states such as New York and Texas, for instance, have access to fewer exchanges than they could in reality. That’s why it’s important to review the exchange’s terms of service and conduct due diligence to confirm that an exchange is legally allowed to operate in your jurisdiction.
Fee structures are another area where big differences exist from exchange-to-exchange. When you withdraw cryptocurrency from an exchange, most only charge a fee to cover the blockchain transaction fees. Some exchanges will charge additional fees based on your country or if you’re withdrawing crypto vs fiat. While some exchanges would charge you exorbitant trading fees, others are pretty competitive with their charges. Worried you’re paying too much in fees across exchanges! This will allow you to determine which would be the most economical alternative for your pattern of trading business.
Exploring Specific Crypto Exchanges
The current state of the crypto exchange market is filled with an overwhelming amount of options and platforms, with various strengths and weaknesses. Here are some examples of exchanges that cater to different needs and preferences:
Next on our list of best overall cryptocurrency exchanges is KuCoin, a global exchange popular for its impressive selection of altcoins and easy-to-use interface. It provides advanced trading tools such as spot and margin trading or futures trading. KuCoin comes with a native token of its own, KCS, which allows users to get discounts on their trading fees and other benefits.
Kraken, another US-based exchange, is a favorite among more experienced traders. It has one of the biggest selections of cryptocurrencies available, margin trading, and a full selection of order types. In addition to its low fees, Kraken is well-known for its robust security features and dedication to regulatory compliance.
BitYard is a newer exchange that prioritizes a great trading experience with industry-leading simplicity and intuitiveness. It doesn’t have the widest variety of cryptocurrencies available, but it does keep cryptocurrency as simple as possible for beginners looking to buy and sell cryptocurrencies. BitYard has copy trading, which lets users copy the trades of experienced traders.
With more than 50 million users, eToro’s social trading platform lets you automatically follow and copy the trades of other successful traders. Its asset variety is second to none with support for crypto, stocks, and commodities. eToro is perhaps best known for its user-friendly interface, but it’s popular for its educational resources.
BTCC, Poloniex, and Bitfinex are exchanges that offer crypto margin trading: the ability to borrow or synthetically borrow additional funds to increase the position and create leverage. Margin trading has the potential to greatly amplify your losses as well as your profits. It’s important to understand the potential dangers first before exploring this kind of fast-paced trading strategy.
