How Exchanges Work
Understand how centralized and decentralized exchanges operate, including order books, AMMs, fees, and the tradeoffs between convenience and self-custody.
What Is a Crypto Exchange?
A cryptocurrency exchange is a platform where you can buy, sell, and trade digital assets. There are two main types: Centralized Exchanges (CEXs) like Coinbase, Kraken, and Binance operate similarly to traditional stock brokerages — a company holds your assets and matches buy/sell orders. Decentralized Exchanges (DEXs) like Uniswap and Jupiter run entirely on smart contracts with no central company involved — you trade directly from your own wallet.
CEX vs DEX: The Basic Difference
CEXs are easier for beginners: you create an account, deposit money, and buy crypto with a familiar interface. The exchange holds your crypto (custodial). DEXs give you full control of your assets at all times (non-custodial), but require a wallet and more technical knowledge. The famous phrase 'not your keys, not your crypto' refers to the risk of leaving assets on a CEX.
- CEX: Easy to use, fiat on-ramp, customer support, but you don't control your keys
- DEX: Full control of assets, no KYC required, but harder to use and no customer support
- Most beginners start with a CEX, then learn DEXs as they gain experience
Exchange Risk
When you leave crypto on an exchange, you trust that company with your assets. FTX collapsed in November 2022, and customers lost billions. Always consider moving significant holdings to a personal wallet.
Key Takeaways
- Centralized exchanges (CEXs) are beginner-friendly but custodial — they hold your crypto
- Decentralized exchanges (DEXs) give you full control but require more technical knowledge
- CEXs require KYC identity verification; most DEXs do not
- Start with a reputable CEX, learn DEXs as you advance
- Never leave more on an exchange than you can afford to lose
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