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Overview of Cryptocurrency Exchanges

Overview of Cryptocurrency Exchanges

So you’ve decided to jump on the crypto bandwagon. Obviously, your bottom line which informs such a decision is to make profits by trading in cryptos. The crypto markets have a diverse set of actors which builds interfaces between the Blockchains, conventional finance and other economic sectors such as facilitation of trade.

The existence of cryptocurrency exchanges adds significant value to the cryptos as they offer means for trading and use beyond the greater economy. As of this writing, there are over 5,000 crypto exchanges and the number is steadily increasing. This is according to CoinMarketCap—a platform that tracks the capitalization of different cryptocurrencies.

But cryptocurrency exchanges are also a minefield for hackers and fraudsters. If you’re not well conversant with this unfamiliar frontier, there are high chances that you’ll be the next target to be scammed. This chapter provides you the big picture view of crypto exchanges to help you become smarter while trading in cryptocurrencies.

But first, let’s define the jargons used in cryptocurrency trading.

Cryptocurrency Exchange Jargons Explained

Cryptocurrency Exchange: A cryptocurrency Exchange is an online platform where you can exchange one crypto for another (or even fiat currency such as the US dollar or Euro). Think of cryptocurrency exchanges as companies that act as intermediaries between parties—who engage on the Platform on a peer-to-peer software that is pre-programmed and doesn’t need a human intervention—to facilitate the exchange of funds.

Fiat: Fiat currencies are the conventional currencies like the US Dollar, Euro, Japanese Yen and British Pound.

Deposit/Withdrawal Fees: It is the amount charged for placing the currency in or taking the currency out of the exchange and its associated wallet. Think of Deposit/Withdrawal Fees as depositing or withdrawing funds using a credit card or bank transfer in the case of fiat money. In Cryptocurrency Exchange, you’ll be charged for successful placement of bitcoins or ETH in your wallet.

Maker Fee: If you place an order that is not instantly matched by an existing order, it will be placed in the order book. If another client places an order which matches yours, you’ll be considered the maker. The make fees will be paid when you add liquidity to your order book by assigning a limit order below the ticker value for the buy and above the ticker value for the sell.

Taker Fee: If you place an order at the market value which gets filled instantly, you’ll be considered a taker. Taker fees will be paid when you remove the liquidity from your order book by assigning any order which is executed against the order in the order book.

Arbitrage trading: Refers to taking advantage of price differences between various markets to trade at a maximum profit. For instance, if Coincheck lists BTC at $10600, while Poloniex lists it $10700, you can buy low at Coincheck and sell it at a higher value on Poloniex.

Types of Exchanges

Crypto exchanges can be grouped into the following categories:

  • Centralized;
  • Decentralized; and
  • Atomic swaps

#1: Centralized Exchanges

These exchanges function (at least from a user point of view) as a conventional bank. They’ll accept your deposits—whether cryptocurrencies or fiat— and just like banks promise to exchange your funds later. In this regard, centralized exchanges act third-party intermediaries which hold your funds in their network until a matching party is found.

Consider the following example:

Suppose your bank account is holding $4000 while the wallet has 0.5BTC and you want to buy 0.05BTC (at the rate of IBTC for $10,000). In this instance, 0.05BTC will translate to $500. Obviously, you’ll place an order to buy 0.05BTC for $500 which will be deducted from your bank account.

The Exchange will deduct $500 (plus bank transaction fees) and hold it for you. Next, the Exchange finds someone who is willing to sell his/her BTC at that price. If a ready trader is found, the transaction takes place on the same platform. Ultimately, you’ll end with less than $3500 as your bank account balance and 0.55BTC as the wallet account balance.

Advantages:

  • Most centralized exchanges have advanced features that promote user experience;
  • Majority of them are easy to use; and
  • They provide advanced tools that can assist a trader with margin trading/lending, and stop loss.

Disadvantages:

They are risky: The Exchange can disappear with your funds;

They are prone to frequent hacks; and

There is no anonymity: Personal documents are required for some features

#2: Decentralized Exchange

Whereas the centralized exchanges act as third parties that hold your funds until a matching trader is found, decentralized exchanges which don’t depend on any intermediary to hold your funds. In other words, a trade will take place directly between you and your partner in an automated and P2P process.

In these platforms, any trader (maker) can place open buy or sell orders for the cryptocurrency of his/her choice while another one (taker) can browse the orders and select to execute them. The diagram below summarizes the transactions in decentralized exchanges:

At an abstract level, here is what occurs:

  • Alice (Maker) places a new order which includes, the type of crypto, the amount, and whether she is buying or selling.
  • Alice generates a cryptographic hash of the order she has just placed and signs it using her private key.
  • Alice sends the order off-chain (Decentralized servers that link with the Blockchain later) through the web sockets.
  • When Bob (Taker) wants to trade against the placed order, the order information and Alice’s signature is transmitted to the smart contract’s trading function.
  • The smart contract code validates that the signature has originated from Alice.
  • The smart contract ensures that order hasn’t expired.
  • Funds are sent to Alice and fees are charged.

Advantages:

They are global: Their services are global with no borders or barriers where any trader can use the Internet to access the services;

  • They are open: Decentralized exchanges open and transparent because the software and transactions taking place on it are open source.
  • They are fast: There is no requirement for registration or validation of accounts since the system doesn’t require personal information;
  • They are foolproof: Decentralized Exchange don’t keep one’s funds like the centralized firms in conventional financial system which are prone to frequent hacks and other fraudulent activities; and
  • They are completely anonymous: they safeguard personal information and credit information identity about traders on their platform.

Disadvantages:

They are not easy to use especially for beginners;

They don’t provide advanced tools that can assist a trader with margin trading/lending, and stop loss; and

If the computer storing the transactions is stolen or hacked, all the funds are lost.

#3: Atomic Swaps

Atomic swap allows 2 traders to exchange cryptos from dissimilar Blockchains in a P2P and trustless manner. For instance, you can exchange bitcoins for ethereum directly. Charlie Lee— founder and developer of Litecoin—recently made a successful atomic swap when he traded Litecoin for bitcoins.

In such an atomic swap, each party agrees to the terms of the trade—which includes the exchange rate— before the start of the transaction. During the transaction, both parties use their private keys to sign a copy of the hashed order. The exchange occurs instantly when the transaction is signed off by both parties.

The diagram below summarizes the steps that you are likely to follow when using the atomic swaps:

Source: Altcoinss.com

At a higher level, here is what occurs:

  • Alice (Maker) places a new order which includes, the type of Blockchain/crypto, the amount, and whether she is buying or selling.
  • Alice generates a cryptographic hash of the order she has just placed and signs it using her private key.
  • Both the maker and the taker use their private keys to sign a copy of the hashed order.
  • The exchange occurs instantly when the transaction is signed off by both parties.
  • Funds are sent to Alice and fees are charged.

Advantages:

  • They are faster: Delays caused by server downtimes and missing deposits or withdrawals in centralized exchanges are minimized;
  • Transacting parties retain their private keys which prevent chances of losing coins;
  • They decentralize the entire trading process making it genuinely P2P;
  • They reduce the transaction fees because there is no third party; and
  • The transaction is entirely

Disadvantages:

  • They are complex to implement as a result of dissimilar Blockchains; and
  • They don’t enhance scalability.

Popular centralized cryptocurrency exchanges

Here are some examples of popular centralized crypto exchanges:

#1: Coinbase

Overview: Coinbase is crypto exchange based in San Francisco, California. Coinbase allows users to exchange bitcoins, Bitcoin Cash, Litecoin, and Ethereum, with fiat currencies in over 32 jurisdictions. Users can buy and sell these cryptocurrencies via a wallet that is available on mobile platforms such as Android and iOS.

Users can also trade with others on the Exchange’s Global Digital Asset Exchange (GDAX) subsidiary. At present, GDAX—which operates in the US, Europe, Canada, Singapore and Australia—doesn’t charge transfer fees when moving funds from Coinbase account to GDAX account.

Website: https://www.coinbase.com

Mobile App: Android/iOS platforms

Deposit/Withdrawal Fees: Coinbase doesn’t charge a levy to use on its Hosted Digital Currency Wallet service. However, transfers of cryptocurrency to other addresses of the platform usually incur network transaction fees like bitcoin miner’s fees.

Trading fees:

Exchange type Maker Taker
All currencies 0% 0.1%

 

Other features:

Feature Details
2FA Google Authenticator provides the security configuration for its 2FA. The 2FA system doesn’t require phone reception and internet access once it has been set up. The 2FA is also not associated with the trader’s phone number even though it’s required during registration.
Wallets The wallets and their associated private keys are stored after performing AES-256 encryption. Most funds are stored in cold storage.
Compliance with KYC Coinbase complies with KYC laws and regulations
Personal information The customer’s details are encoded and stored off-site
Has it ever been hacked? At present, Coinbase is one of only a few such exchanges which has never been hacked.

#2: BitStamp

Overview: BitStamp is a European-based digital currency exchange headquartered in Luxembourg. It allows the exchange of currencies between USD and EUR with popular cryptos such as Bitcoin, Ethereum, Litecoin, Ripple and Bitcoin Cash.

Whereas the company trades in USD, it also accepts fiat currency deposits for free only through the Single Euro Payments Area—a European Union platform for transferring funds between different European bank accounts with a credit card and wired transfer deposits incurring fees.

It provides an API which allows its clients to use customized software for accessing and controlling their accounts.

Website: https://www.bitstamp.net/

Mobile App: Android/iOS platforms

Deposit/withdrawal fees:

Transaction type Fee
Deposit 0.05% deposit fee on Bitstamp’s side where the minimum charge is 7.5 USD/EUR while the maximum fee is 300 USD/EUR.
Withdrawal 0.09% fee, where the minimum fee is 15.00 US $/EUR on the Bitstamp’s end which can incur additional charges in the form of international bank fees

 

Trading fees:

Exchange type Maker Taker
All currencies 0% 0.1%

 

Other features:

Feature Details
2FA Google Authenticator provides the security configuration for its 2FA.
Wallets The wallets and their associated private keys are stored after performing AES-256 encryption. Most funds are stored in cold storage.
Compliance with KYC It complies with KYC laws and regulations
Personal information The customer’s details are encrypted and kept off-site
Has it ever been hacked? In February 2014, the Exchange temporarily suspended withdrawals for many days as a result of the DDoS attack.  At the time, it was reported that hackers behind the DDoS attack had sent a ransom demand for 75 bitcoins. After restoring the service, it temporarily suspended withdrawals for some accounts as a security precaution because of increased phishing attacks.

In January 2015, the Exchange suspended its services as a result of hack where approximately 19,000BTC were stolen. It was reopened a week later.

 

#3: Poloniex

Overview: Poloniex is a US-based digital currency exchange that touts providing maximum security and other advanced trading capabilities. The majority of client deposits are stored off-line in a cold storage stored. Poloniex’s popularity is because the platform provides a wide selection of Altcoins for users to choose from.

Website: https://poloniex.com/

Mobile App: At present, there are no mobile platforms for Poloniex

Withdrawal/Deposit Fees: There are no fiat deposit/withdrawals. The minimum deposit required in Poloniex is 10.5ETH while a withdrawal fee of 0.005 ETH is necessary when transferring funds to other wallets.

Trading fees:

Exchange Type Maker Taker
All Currencies 0.15% 0.25%

 

Other features:

Feature Details
2FA Google Authenticator provides the security configuration for its 2FA.
Wallets The wallets and their associated private keys are stored after performing AES-256 encryption. Funds are stored offline in cold storage.
Compliance with KYC It complies with KYC laws and regulations
Personal information The customer’s details are encrypted and kept off-site
Has it ever been hacked? In March 2014, Poloniex was hacked where it lost over 12.3% of its total bitcoins. As a result of the hack, Poloniex temporarily reduced its customers’ bitcoin balances by 12.3% out of necessity.

To compensate the lost bitcoins, Poloniex promised to pay back all customers who had lost their bitcoins using exchange fees and personal contributions. As a result, all the exchange fees were temporarily increased to 1.5%, up from 0.2%.

 

#4: Bittrex

Overview: Bittrex is a crypto exchange based in Las Vegas, US. Just like Poloniex, Bitter’s popularity is because the platform provides a wide selection of Altcoins for users to choose from with no fiat support.

Website: https://bittrex.com/

Mobile App: At present, there are no mobile platforms for Bittrex.

Withdrawal/Deposit Fees: There are no fiat deposit/withdrawals. Withdrawals vary depending on the Altcoin which helps to cover the gas fee.

Trading Fees:

Exchange Type Maker Taker
All Currencies 0.25% 0.25%

 

Other features:

Feature Details
2FA Google Authenticator provides the security configuration for its 2FA.
Wallets The multi-stage wallets and their associated private keys are stored after performing AES-256 encryption. Funds are stored offline in cold storage.
Compliance with KYC It complies with KYC laws and regulations
Personal information It uses IP Whitelisting which restricts trading from new customers based on their addresses.
Has it ever been hacked? Currently, there are no reported cases of hacking on Bittrex platform.

 

#5: Kraken

Kraken was conceived in 2011 and is one of the largest Bitcoin exchange regarding euro volume and liquidity. Kraken lets its users buy/sell bitcoins and trade them with USD, Euro, Canadian Dollars, Japanese Yen and British Pound.

It also offers a system for trading in cryptocurrencies like Ethereum, Ethereum Classic, Monero, ICONOMI, Zcash, Litecoin, Ripple, DodgeCoin, Augur REP tokens and Stellar/Lumens. Besides crypto exchange, Kraken also offers margin trading and lending features to its user base.

Website: https://www.kraken.com/

Mobile App: Android/iOS platforms

Withdrawal/Deposit Fees: There are no fiat deposit/withdrawals. Withdrawals vary depending on the Altcoin which helps to cover the gas fee.

Trading Fees:

Exchange Type Maker Taker
All Currencies 0.0% 0.1% – 0.2%

 

Other features:

Feature Details
2FA Google Authenticator provides the security configuration for its 2FA.
Wallets The multi-stage wallets and their associated private keys are stored after performing AES-256 encryption. Funds are stored offline in cold storage.
Compliance with KYC It complies with KYC laws and regulations
Personal information It uses IP Whitelisting which restricts trading from new customers based on their addresses.
Has it ever been hacked? There are no reported cases of hacking on Bittrex platform.  However, in January 2018, the platform went down for almost 40 hours as a result of lengthy system maintenance which cost a lot of money for its investors.

 

Popular Decentralized cryptocurrency exchanges

Here are some examples of popular decentralized crypto exchanges:

#1: Waves Dex

Waves Dex or simply Waves is a product of Blockchain and Waves cryptocurrency which provides its users with the best of the 2 worlds (decentralized and centralized) to allow them to control their funds on the Blockchain while accelerating the exchange process using the centralized principles.

Essentially, Waves allows users to exchange their bitcoins/ether in exchange for Waves (and any other digital asset provided on the platform).

Website: https://wavesplatform.com/

Mobile App: Android/iOS platforms

Withdrawal/Deposit Fees: There are no fiat deposit/withdrawals.

Trading Fees:

Exchange Type Maker Taker
All Currencies 0.003 WAVES 0.003 WAVES

 

Other features:

Feature Details
2FA Google Authenticator provides the security configuration for its 2FA.
Wallets Fiat currencies are stored offline in cold storage.
Compliance with KYC KYC/AML is required if a user wants to deposit and withdraw fiat. For crypto-to-crypto trading, no KYC/AML is required.
Has it ever been hacked? There are no reported cases of hacking on the WaveDex platform.

#2: IDEX

IDEX is a decentralized exchange platform allows its users to trade in ERC-20 tokens with much ease. You can use IDEX as an alternative for EtherDelta regarding user interface. You can also use this platform with Ledger Nano S or MetaMask-like wallets to if you want to boost security while during trading.

As of this writing, the volume on this exchange is slightly higher than 360 BTC with over 130 cryptocurrencies and digital assets being listed.

Website: https://idex.market/

Mobile App: Android/iOS platforms

Withdrawal/Deposit Fees: There are no deposit/withdrawals.

Trading Fees:

Exchange Type Maker Taker
All Currencies 0.01% 0.01%S

 

Other features:

Feature Details
2FA Google Authenticator provides the security configuration for its 2FA.
Compliance with KYC No KYC/AML is required for crypto-to-crypto trading
Has it ever been hacked? There are no reported cases of hacking on IDEX platform.

#3: Bitsquare

Bitsquare is a fully decentralized and P2P marketplace for cryptocurrencies that requires no name, email or verification during trading. To enhance its P2P and anonymity, Bitsquare uses the Tor browser and doesn’t hold fiat currencies or cryptos on their servers.  As of this writing, Bitsquare supports over 126 cryptocurrencies and is available on Linux, Windows, and Mac platforms.

Website: https://bisq.network

Mobile App: Android/iOS platforms

Withdrawal/Deposit Fees: There are no deposit/withdrawals.

Trading Fees:

Exchange Type Maker Taker
All Currencies 0.002 BTC/per bitcoin 0.002 BTC/per bitcoin

 

Other features:

Feature Details
2FA Google Authenticator provides the security configuration for its 2FA.
Compliance with KYC No KYC/AML is required
Has it ever been hacked? There are no reported cases of hacking on the Bitsquare platform.

 

#4: Oasis Dex

It is a decentralized exchange by MakerDao which allows its users to exchange cryptocurrencies. As of this writing, the platform is still in alpha testing stage with a promising volume of 90BTC. However, despite that, you can find a good volume for its three cryptocurrency pairs namely the MKR/ETH, ETH/DAI, and MKR/DAI.

Website: https://oasisdex.com/

Mobile App: Android/iOS platforms

Withdrawal/Deposit Fees: There are no deposit/withdrawals.

Trading Fees:

Exchange Type Maker Taker
All Currencies 0.20% 0.20%

 

Other features:

Feature Details
2FA Google Authenticator provides the security configuration for its 2FA.
Compliance with KYC No KYC/AML is required
Has it ever been hacked? There are no reported cases of hacking on OasisDex platform.

#5: BarterDex

BarterDex—a product of Komodo—combines both decentralized exchange and atomic swap features to provide its users with advantages of both platforms. As of this writing, BarterDex facilitates trade in more than 80 cryptos, has crossed 60,000 atomic swaps on its platform and has a volume 2BTC.

Website: barterdex.supernet.org

Mobile App: Android/iOS platforms

Withdrawal/Deposit Fees: There are no deposit/withdrawals.

Trading Fees:

Exchange Type Maker Taker
All Currencies 0.15% 0.15%

 

Other features:

Feature Details
2FA Google Authenticator provides the security configuration for its 2FA.
Compliance with KYC No KYC/AML is required
Has it ever been hacked? There are no reported cases of hacking on the BarterDex platform.

 

 Popular Atomic Swaps

As of this writing, atomic swaps are still in their infancy. As mentioned earlier, Charlie Lee, recently swapped Litecoin for Bitcoin, Decred, and Vertcoin. Litecoin crypto might just be the first Blockchain to implement atomic swaps. Other emerging platforms in this frontier are:

  • BarterDex: The Komodo team which owns BarterDex recently announced that they had completed atomic swap on their Electrum server.

Blocknet: Blocknet wants to implement an internet of Blockchains based on atomic swaps where users will incur 0% trading fees.

April 14, 2021
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