The Evolution of Exchanges: Traditional Exchanges, Centralized Exchanges, and Decentralized Exchanges

centralizedcentralizedDifferentiate from decentralized exchanges. These two types of exchanges are completely new concepts pioneered by cryptocurrency trading.

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The working mode of traditional exchanges

In the traditional trading world, such asforeign exchangeAnd with the stock market, we're almost always talking about a centralized exchange: a company that has both buyers and sellers. For example, the New York Stock Exchange is a centralized exchange — it operates a market in the form of a corporation that enables people to exchange one asset for another.

For example, when two people want to exchange dollars for shares in Apple, they need a place to meet in order to exchange the two assets. The best way for them to meet is through an exchange that maintains transparency of all the different prices so that everyone can see what the dollar exchange rate for Apple shares is. This is basically what all traditional centralized exchanges use, such as NYSE, NASDAQ, Dow Jones, and HKEX.

While traditional exchanges like Nasdaq are widely believed to be running smoothly, the reality of layered inefficiencies beneath the surface actually paints a different picture.

When two people transact on one of these exchanges, they are not actually dealing directly with each other. Instead, the centralized exchange is the transaction party. For example, it is the New York Stock Exchange that hosts the U.S. dollar and Apple shares. Centralized exchanges act as middlemen, matching requests between buyers and sellers of dollars and Apple shares. This concept is known as order matching.

But that doesn't mean anyone can go to the Nasdaq website and register for a trade. There is also no Nasdaq bank account to send money to. Instead, individual traders need to go through a broker that connects directly to an exchange (for example, a trading app like eToro). This is at both ends of the transaction, and there are several layers of intermediaries just for a simple transaction.

But there's more.

Brokers use different accounts at different banks to settle between each other and centralized exchanges. As another intermediary layer, banks multiply this inefficiency. They have no incentive to make transactions faster because it is profitable for the banks themselves to hold more money.

In fact, most of the traditional exchanges in the world adopt the T+2 model, which means that it actually takes two days to settle. Even if your trading app says "Order Completed", the reality behind it is that the trade will not be settled until 2 days later. Given the size of the industry, that means billions of dollars are sitting in banks every day, awaiting settlement.

Overall, the whole process seems out of place with the way work is done today, where everyone is used to downloading a mobile app and immediately starting using a service. Traditional exchanges aren’t even open 24 hours, which means that if something big happens over the weekend, the market won’t react until Monday morning.

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How centralized cryptocurrency exchanges work

There are hundreds of cryptocurrency exchanges around the world, including AAX, Binance, Coinbase, Kraken,FTX, BitMEX, etc. Unlike traditional centralized exchanges, you can go directly to the website of any of these cryptocurrency exchanges, sign up and start trading. Trades are made with a direct connection to the exchange, meaning there are no further brokers or other intermediaries involved other than the exchange itself acting as a counterparty to the order-maker.

Another big difference compared to the traditional model is that centralized cryptocurrency exchanges actually controlorder bookand your funds. Centralized exchanges are responsible for keeping your funds safe and protecting it from hackers, which makes trusting the exchange as a good custodian a very important factor.

Cryptocurrency centralized exchanges are fast, but not as fast as traditional exchanges. It has a lot to do with the total number of customers they serve and where they are located. A traditional exchange actually only serves a limited number of clients - a handful of brokers who can get in - and its servers are installed right next to the exchange. In contrast, a cryptocurrency exchange needs to serve anyone with a computer anywhere in the world.

fluidityfluidityBoth are on centralized cryptocurrency exchanges because they are usually easy to use. You don't need to manage your keys, learn or understand complex wallets. All you need is an email and a password to start trading. The downside of this is that all funds are held in one centralized place, making it a target for exchange hacks - in the pastthere are manySuch an example.

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How Decentralized Exchanges Work

DEXs are the opposite of centralized exchanges. DEX provides a trading ecosystem that closely reflects the core values ​​of the cryptocurrency community around personal empowerment, decentralization, and financial sovereignty.

Generally speaking, a cryptocurrency exchange has three basic functions: money management, order book, and cryptocurrency trading. For an exchange to be truly decentralized, each of these functions must operate in a decentralized manner.

Users' funds will not be entrusted to third parties. Users are the custodians of their own funds, holding their assets in their own hot and cold wallets.

Orders must be broadcast directly from one trader to another, with their application compiling the order book without relying on some kind of central order book service.

Orders are matched directly between traders and then broadcast across the interchain network for direct peer-to-peer settlement as users' applications communicate to establish the trade process.

DEXs work in a distributed fashion, with cryptocurrency transactions occurring directly between parties on a peer-to-peer basis, settled on the blockchain. This means that instead of needing a single centralized authority, users rely on multiple independent nodes connected to exchanges to facilitate transactions.

DEXs are the opposite of centralized exchanges. DEX provides a trading ecosystem that closely reflects the core values ​​of the cryptocurrency community around personal empowerment, decentralization, and financial sovereignty.

Generally speaking, a cryptocurrency exchange has three basic functions: money management, order book, and cryptocurrency trading. For an exchange to be truly decentralized, each of these functions must operate in a decentralized manner.

Users' funds will not be entrusted to third parties. Users are the custodians of their funds and therefore hold their assets in their own hot and cold wallets.

Orders must be broadcast directly from one trader to another, with their application compiling the order book without relying on some kind of central order book service.

Orders are matched directly between traders and then broadcast across the interchain network for direct peer-to-peer settlement as users' applications communicate to establish the trade process.

DEXs work in a distributed fashion, with cryptocurrency transactions occurring directly between parties on a peer-to-peer basis, settled on the blockchain. This means that instead of needing a single centralized authority, users rely on multiple independent nodes connected to exchanges to facilitate transactions.

Since transactions on DEXs are direct transactions between trading parties, DEXs do not hold each investor's funds in a wallet owned by the exchange. Individuals on a DEX have custody of their own funds, wallets, and keys. There is no centralized authority that can block your transactions or freeze your accounts. However, if you lose access to your account or lose your keys, there is also no central authority to restore access. Like in the real world, if you leave your wallet on a park bench and walk away, you just lose your wallet.

In the early days, trading on DEXs had some serious drawbacks: slow transactions, low liquidity, and generally a poor user experience. Decentralized exchanges are mostly used by cryptocurrency veterans, who shrug off the DIY nature of trading on niche platforms. But then things changed. a big change.

Trading on a DEX today can be as easy as trading on a centralized exchange. A lot of work has been done on the user interface to make it more intuitive for cryptocurrency traders of different experience levels. With the rise of DeFi, the liquidity of top DEXs such as Uniswap, MDEX, PancakeSwap, SushiSwap, and 1inch Exchange has greatly improved. And withSolanaprojectprojectProvide more powerful, on-chain transaction assets no longer at the expense of lower speed.

AAX is a digital asset exchange powered by London Stock Exchange Group technology. AAX Vision is a blockchain industry observation channel created by AAX, which aims to help more users broaden their horizons and learn more about blockchain news.

About AAX Horizons

AAX is a digital asset exchange powered by London Stock Exchange Group technology. AAX Vision is a blockchain industry observation channel created by AAX, which aims to help more users broaden their horizons and learn more about blockchain news.