Best Crypto Exchanges of 2023 – Forbes Advisor Australia
Broadly speaking, there are two categories of crypto exchanges: centralized and decentralized. Each category comes with its advantages and disadvantages.
Centralized exchanges
Centralized crypto exchanges (CEX) are managed by one organization. Centralized exchanges make it easy to start cryptocurrency trading by allowing users to convert their fiat currency, such as Australian dollars, directly into crypto. The vast majority of crypto trading takes place on centralized exchanges.
Some crypto enthusiasts object to centralized exchanges because they run counter to the decentralized ethos of cryptocurrency. Even worse, in the eyes of some crypto users, the company or organization may require users to follow Know Your Customer (KYC) rules. These require each user to reveal their identity, much like you would when applying for a bank account, to combat money laundering and fraud.
There is another concern with centralized exchanges: hacking. With a CEX, the exchange holds the crypto traded on its platform – at least in the short term, while trades go through – increasing the risk of hackers stealing assets.
Centralized crypto exchanges have strengthened security in recent years to address this risk. Among other strategies, they now store most customer assets offline and take out insurance to cover crypto losses in the event of hacking.
If you like the convenience of a centralized exchange, you can reduce your risk by transferring your crypto to a separate hot or cold wallet outside of the exchange.
Decentralized exchanges
A decentralized exchange (DEX) is a marketplace where users can trade cryptocurrencies directly with each other without the involvement of intermediaries. This means that there is no need for a third party to oversee the transfer and custody of funds. Instead, DEXs use blockchain-based smart contracts to enable the exchange of assets, effectively replacing traditional intermediaries such as banks, brokers and CEXs.
Unlike transactions processed on a CEX, which lack transparency and rely on an intermediary, DEXs provide complete transparency regarding the movement of funds and the mechanisms involved in the exchange. In addition, DEXs reduce counterparty risk by eliminating the need for user funds to pass through a third-party cryptocurrency wallet during trading. This, in turn, can reduce systemic centralization risk within the cryptocurrency ecosystem.
Unlike their centralized counterparts, DEXs do not typically use an order book system for trades. Instead, they use Automated Market Makers (AMM). An AMM can be considered a money robot that can quote a price between two or more digital assets. This system is beneficial in that it creates immediate access to liquidity that would otherwise be unavailable, enabling trading of low liquidity assets. Due to access to instant liquidity, buyers and sellers do not have to wait for their order to match with a counterparty, allowing the trade to be executed immediately. Liquidity providers to DEXs earn fees from their trading activity, creating an opportunity for passive income generation.
However, there are some downsides to DEXs. A major disadvantage is that decentralized exchanges are much less user-friendly, not only from an interface standpoint, but also in terms of currency conversion. Decentralized exchanges, for example, do not always allow users to deposit dollars and exchange them for crypto. This means you either have to own crypto or use a centralized exchange to get crypto which you then spend on a DEX. For this reason, many newer investors will stick with CEXs due to their ease of use and one-stop-shop functionality.
Global crypto exchanges
There are nearly 600 cryptocurrency exchanges worldwide that invite investors to trade bitcoin, ethereum and other digital assets. But costs, quality and safety vary widely. With an emphasis on regulatory compliance, Forbes Digital Assets ranked the top 60 cryptocurrency exchanges in the world.
