In and of itself, an exchange is nothing more than a mechanism through which different parties can trade one cryptocurrency for another. Although the concept itself is simple, acronyms such as CEX and DEX and terms like “on-ramp” might be confusing for beginners. In this article, I'd like to provide a very brief overview of the different kinds of cryptocurrency exchanges, how they function, and some of the differences between them.
The original type of exchange is a centralized exchange (infrequently, abbreviated CEX). A centralized exchange, such as Coinbase or Binance, is an exchange that allows different parties to trade crypto-currencies by facilitating the transaction. When using a centralized exchange, both parties deposit their funds onto the exchange. Once the exchange is executed, the funds must be manually removed from the exchange to the user's actual wallet.
Although there is no one-size-fits-all statement that can describe every centralized exchange, centralized exchanges, in general, have a high trade volume and name recognition that makes them attractive to beginners. Centralized exchanges also run promotions and advertisements to attract and onboard new users. I know that my first cryptocurrency trading was done on Coinbase after I was enticed by their Coinbase Earn program.
While the name recognition and promotions can be thought of as a strength, centralized exchanges are sometimes criticized because they require users to deposit funds onto the platform (security risk) and also complete an identity verification process (privacy concern). A decentralized exchange (DEX) is a form of exchange that allows users to trade cryptocurrency directly from their wallets by interacting with a smart contract on the exchange.
Whether a person chooses to use a centralized exchange or a decentralized exchange, the fact remains that both of them allow users to swap one cryptocurrency for another, but what if you don't have any cryptocurrency to begin with? To “get in the game” with cryptocurrency, you will need some form of an on-ramp.
An on-ramp is not a specific type of exchange. Rather, it simply refers to an exchange that supports selling fiat and purchasing crypto. On ramps are a critical part of the cryptocurrency ecosystem because they are the bridge that connects “real” money to the crypto world. Once a user has cryptocurrency, they can partake of all the wonderful parts of the cryptocurrency ecosystem including yield farming, liquidity mining, decentralized lending, trading, etc, but without the all-critical “on-ramp” users simply have no way of accessing the cryptocurrency ecosystem.
In summary, cryptocurrency exchanges fulfill the function of allowing people to trade the cryptocurrency that they have for the cryptocurrency that they want. Centralized exchanges require a user to submit identity documents and deposit their funds onto the exchange while a decentralized exchange allows users to trade automatically from their wallets without having to complete identity checks.
Thanks for reading!