Introduction to Exchange

The goal of this section is to offer a broad introduction to cryptocurrency exchanges and orderbooks, while also providing a thorough understanding of both centralized and decentralized exchanges.

1. Cyptocurrency Exchange

A cryptocurrency exchange is a platform where traders or users can exchange fiat currency and digital currency (cryptocurrency), or exchange between two different cryptocurrencies. There are two typesof exchanges: centralized and decentralized exchanges.

2. Centralized exchange

A centralized exchange (CEX) is run by trusted intermediaries who act as custodians of wallets to facilitate transactions. The orderbook system lists and sorts buy and sell orders, allowing users to trade cryptocurrencies at the best available market price. Popular CEXs include Binance, Coinbase, and Kraken.

While centralized exchanges are convenient, they have been criticized for their lack of decentralization and reliance on third-party intermediaries. Traders deposit their assets on the exchange, making them vulnerable to fraud and theft, especially in the DeFi space, where "rug pulling" is a concern. Traders must exercise caution, assess the trustworthiness of the exchange, and take security measures to protect their assets.

3. Decentralized exchange

A decentralized exchange (DEX) is a platform for trading cryptocurrencies that operates independently of a central authority or middleman. Instead, a DEX enables users to directly transact with each other using blockchain technology and smart contracts, which provide increased security and transparency by removing the need for human central authority.

There have been many advancements and developments in the format of DEX, including:

1. Automated Market Makers (AMMs): These use algorithms to determine the price of assets based on the supply and demand of the market. Examples of AMMs include Uniswap and Pancakeswap.

2. Orderbook-Based DEX: These are DEXs that use a traditional orderbook system, similar to centralized exchanges. Examples of orderbook-based DEX include DyDx, Polkadex, and GMX.