A Short History of Cryptocurrency Exchanges

The history of cryptocurrency exchanges can be traced back to 2010. In February 2010, roughly 15 months after Satoshi Nakamoto published the Bitcoin whitepaper on October 31, 2008, Bitcoinmarket.com was launched, stemming from the need to trade. Naturally, people have always loved to speculate, and the emergence of a new market meant new opportunities.

Prior to this, the only way early adopters could get their hands on Bitcoin (BTC) was through CPU mining. Those who couldn’t would trade Bitcoin through forums. That’s how rudimentary it was. On June 1, 2011, weeks after integrating PayPal and instantly linking fiat, Bitcoinmarket.com was abruptly cut off.

Even though that was the end of Bitcoinmarket.com, the website’s closure allowed for the now infamous Mt Gox to reign. At its peak, the exchange handled up to 70 percent of global BTC volumes before its unfortunate hack. But Mt Gox was not the only cryptocurrency exchange at the time. Bitstamp, Kraken, Bitfinex, and ItBit are also some of the pioneering exchanges and are all still in operation, having upscaled, become resilient against hacks, and grown to serve an ever-increasing client base.

Here is a map of the main cryptocurrency exchanges on the market:

What are cryptocurrency exchanges?

A cryptocurrency exchange is simply a place where you can buy or sell crypto on demand.  These exchanges all have different rules of operation but generally list the most popular cryptocurrencies in the market.

Both cryptocurrency exchanges and traditional exchanges facilitate trade across thousands of accounts, but they have vastly different setups. In contrast to traditional financial markets, where different institutions, such as exchanges, brokers, clearing houses, and banks, provide infrastructure to minimize risks, in the cryptocurrency market, an exchange is usually a combination of all these institutions in one entity.

Shane Molidor, the Global Head of Business Development for FBG One, aptly summarized a cryptocurrency exchange’s role as “more analogous to all-in-one platforms that interact with a custodian, the exchange, and a clearing agency, rather than just one place to exchange funds.

The truth is that the digital asset marketplace is ever-changing, fluid, and largely unpredictable. Nonetheless, cryptocurrency exchanges play a critical role in the digital asset ecosystem. Statistics drawn from OpenMarketCap, a tracker that filters fake volumes, reveal that the total coin market capitalization as of this writing is $294 billion.

On the flip side, the world’s largest stock exchange by market cap was the NYSE. The market cap of all the listed companies on this exchange exceeded $23 trillion. This is more than twice that at NASDAQ at $11 trillion and more than four times that of Japan Exchange Group at $5.6 trillion, according to Statista.

In comparison, Binance, the world’s largest cryptocurrency exchange by adjusted trading volumes, moves roughly $1.2 billion, or 109,000 BTC, a day. From this, it is clear that cryptocurrency exchanges, having been in operation less than 15 years, have a lot of ground to cover before matching traditional exchanges.

A Level Deeper: Centralized Crypto Exchanges

Centralized cryptocurrency exchanges are online platforms for buying and selling digital assets. Since these assets are based on the principles of decentralization as espoused by blockchain, trading them through a “centralized” entity means trusting a third party that monitors and secures assets on behalf of the buyer and seller. None of these transactions are tracked on the blockchain.

Because the owner has transferred control to the exchange, in the case of a lost password or 2FA, verified users can easily recover their coins by reaching out to the exchange’s support team. All centralized exchanges demand the submission of personal or corporate details and are often multi-tier – the more submissions, the higher the withdrawal quota allowed.

Most centralized cryptocurrency exchanges offer fiat pairs and are therefore popular. Furthermore, because of the centralization, the prices tend to be stable with a relatively high throughput, meaning they can scale to accommodate more users. However, that is not to say all crypto exchanges are successful. Some, in the event of a hack, shutter and fold. Others, depending on their initial reception and applicable territorial law, end up refunding victims from their own coffers or through insurance.

Types of Centralized Cryptocurrency Exchanges

Conventionally, there are two categories of centralized exchanges: spot and derivative. Then there is a hybrid of the two. A hybrid cryptocurrency exchange enables both spot and derivative trading, with leverage for the most liquid cryptocurrencies. In this arrangement, there are two types of accounts. One is for spot trading, effectively acting as a spot cryptocurrency exchange, and the other is margin accounts, for leverage or margin trading. Different order books exist to cater to the respective accounts, but transfer between the two is possible. An example is Xena Exchange, a trading platform that offers both spot and leverage trading (up to 20x leverage).

Increasingly, centralized spot exchanges are offering margin trading, with Binance and OKEx being the latest. BitMex and Deribit are examples of pure derivative cryptocurrency exchanges, and Bitstamp and Coinbase Proare examples of pure spot cryptocurrency exchanges.

The top five crypto exchanges by daily trade volume as of Aug 10, 2019, as per Coingecko are as follows:

Evidently, centralized exchanges are still dominant in crypto circles. But will this last? Let’s find out.

What are Decentralized Crypto Exchanges (DEx)?

A decentralized exchange, or DEx, is a cryptocurrency exchange where traders can make transactions without relying on a third party. Funds are stored on the blockchain. Trading is automated and peer-to-peer (P2P). To make this possible, trading is facilitated either through proxy tokens, assets, or a multi-signature escrow system, eliminating the need for the “IOU”s used by centralized cryptocurrency exchanges.

There are two types of decentralized cryptocurrency exchanges: currency-neutral and currency-centric. Currency-centric exchanges are specific to the  blockchain escrowing its native currency. The blockchain can be Ethereum, Waves, Tron, or any other smart-contract-enabled blockchain.

Currency-neutral DExs like Block DX are not tied to any one blockchain. They can be built on top of several blockchains and are not limited to a specific coin’s ecosystem. This “modern” setup brings about secure order matching, transparent handling of order books, and decentralized asset exchange.

How a Decentralized Exchange (DEx) Works

You may be blown away by centralized exchanges, but there are many reasons why market participants are gravitating toward and keen on strengthening decentralized exchanges. After all, decentralization and blockchain go hand in hand.

Currently, the objective of developers is to enhance DExs’ capital deposition, order books, order matching, and asset exchange. A crypto-to-crypto asset exchange is, regardless of exchange type, a decentralized event because tokens/coins are moved frequently between different blockchains or ecosystems.

In the ideal decentralized exchange architecture, there is node distribution without server centralization or control, and all the other core exchange functions are executed on the blockchain without requiring permission.

This is how a typical DEx works:

  • The client brings their funds (say, Bitcoins) to the gate. The gate stores the client’s Bitcoins and issues the same amount of tokens (proxy tokens – let’s call them DexBTC in this example) that can be traded within the DEx’s blockchain. Basically, these tokens are collateralized by the real Bitcoins kept at the gates.
  • The client sends an order to sell their DexBTC and get, say, DexETH (another proxy token) in exchange. The order, the matching process, and the resulting trades are all stored on the blockchain — that’s the really good part of this concept.
  • After receiving the DexETH, the client may convert them to real ETH (Ether) using the same or another gate.

Shortcomings of DEXs

Clearly, there are some outstanding benefits users can draw from a decentralized exchange. One of them is the nature of the operation, where there is no need to trust a third party –the exchange – with your funds. DExs operations are peer-to-peer, without the involvement of central authorities. Therefore, they offer the advantage of censorship resistance, and funds are directly controlled by the user.

Additionally, there is an element of privacy and high reliability because of the distributed nature of blockchain nodes. Unless the transaction involves payment in fiat, where the end user is required to reveal personal details, asset exchange is private, with the identities of market participants divulged only to the buyer and seller.

The thing is, the concept is good, but it’s hardly viable in its current state. First, there’s low liquidity, as DExs, despite what they promise to deliver, have yet to benefit from the network effect and the critical mass that draws users, enhancing liquidity and gradually improving functionality from the current bare bones.

Second, the general throughput is low, meaning the deployment of bots or any form of high-frequency trading is not currently possible. Order matching in centralized exchanges is faster by several magnitudes, regardless of the speed of the blockchain the DEx is built on.

Then again, from our assessment, the counterparty risk on decentralized exchanges is hardly any lower than that of centralized exchanges. Think about it: Even if the asset exchange is via proxy tokens or assets, the use of gates is a security concern, as they are the weakest link in this arrangement. What if the gate fails to convert the token to or from the proxy token required for trading? Then again, the asset exchange takes place via smart-contract-enabled atomic swaps with no fiat support – as that would be an obvious point of failure. From what we have seen, smart contracts, unless thoroughly audited before deployment, can contain several vulnerabilities, such as overflows or underflows, and are prone to re-entry attacks. If smart contracts are unchecked, millions worth of coins could be lost from a simple error.

Evidence shows that decentralized exchanges are far from achieving the level of scalability, liquidity, and, most importantly, functionality that will incentivize users to shift from centralized exchanges. As long as the blockchain trilemma remains unsolved, DExs will likely lag behind centralized exchanges.

Here are some of the most famous decentralized crypto exchanges:

  • Waves DEX: Trading volumes of $307,134 per day
  • IDEX: Trading volumes of $975,990 per day
  • OpenLedger DEx: Trading volumes of $28,599 per day
  • CryptoBridge DEx: Trading volumes of $145,812 per day
  • Bisq: Trading volumes of $120,270 per day

Statistics from CoinMarketCap

Decentralized vs. Centralized Exchange: The Key Differences

Even though there are concerns that need to be addressed, 2018 saw a significant rise in the number of DExs developed. A report from Token Insight confirms the above disparities: Centralized exchanges are way ahead of the curve.

After analyzing data from 400 leading global cryptocurrency exchanges, Token Insight found that only 19 percent of all exchanges are decentralized. Despite that, trading volumes from these exchanges represented a mere one percent, and the exchanges were mostly built on top of Ethereum and EOS platforms.

A key takeaway from this report is that DExs are more sensitive to asset prices. For example, in Q4 2018, trading volumes fell in response to free-falling asset prices. Token Insight noted this, saying, “To a certain extent, decentralized exchanges have been more sensitive than central exchanges to the overall downward trend of the secondary market.”

Generally, centralized exchanges have legitimacy and trust from investors, since they have been around from the very beginning. However, this does not prevent regulators from getting involved.

For example, in an advisory issued in Q1 2018, the main US regulator, the Securities and Exchange Commission (SEC), said, “Platforms refer to themselves as ‘exchanges,’ which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange.” A few months later, in Nov 2018, the SEC charged Zachary Coburn, the founder of EtherDelta, with operating “an unregistered national securities exchange.” Coburn settled with the agency, paying “$300,000 in disgorgement plus $13,000 in prejudgment interest and a $75,000 penalty.

Here is a comparison between centralized and decentralized exchanges:

Centralized Cryptocurrency Exchange Decentralized Cryptocurrency Exchange
Security Vulnerable, single point of failure Secured by blockchain
Control Full control belongs to the exchange User has control of funds
Speed High throughput because of centralized servers The distribution of blockchain nodes means low throughput
Fees Charged Very low and sometimes not charged when order matching is on the blockchain
Personal Details Required Not required
Liquidity Very liquid Moderately liquid
Functionality Easy to use, suitable for all traders Complex interface, meant for experienced traders


Centralized exchanges have a considerable amount of security but are nonetheless fallible. Exacerbated by their custody of funds and information, any infiltration can be devastating. In the event that hackers gain access to the private keys, all accounts in the ecosystem can be compromised. The case of Cryptopia is a perfect example.

On the other hand, decentralized exchanges store neither user private keys nor digital assets. This means that DExs are only matching entities, and there is virtually no way a security issue will affect a large number of users unless there is a vulnerability in the DEx gates.

The good news is, there has been development to reduce the counterparty risk of exchanges. Xena Exchange, for example, is introducing decentralized accounts (DAccs). DAccs are built using a proprietary clearing protocol with similar working principles as those of Bitcoin’s Lightning Network (LN). Although DAccs don’t completely eliminate counterparty risks, this arrangement allows the coin owner to have full control of his or her coins while still enjoying the benefits of centralized trading because of segregated fund storage.

Speed & Liquidity

Centralized crypto exchanges often have excellent liquidity because many users cansimultaneously purchase a certain asset when demand is high.

During such periods, market makers play a critical role, adding liquidity to the order book. Without their participation, the discrepancy of asset prices across different exchanges would be pronounced, giving room for arbitrage.

By placing multiple limit orders in an exchange’s order book, market makers create an active trading environment for buyers and sellers. However, not everyone can play the market maker role. Usually, market makers are registered institutions that have signed a special agreement with the exchange. With an agreement in place, they are offered low trading fees in exchange for quality liquidity. To gauge how liquid an exchange is, one ought to check the existing spreads and the depth of the order book.

That said, decentralized exchanges struggle with liquidity because orders often need to be matched, which takes time. As such, DExs cannot match the liquidity of centralized exchanges because of the overwhelming disparity in popularity.

In terms of speed, centralized exchanges also boast an advantage. According to a speed analysis by the derivative trading platform Deribit, the average order execution of centralized cryptocurrency exchanges is 10 milliseconds. In contrast, matching and filling an order on a decentralized exchange can take anywhere between 15 seconds and a minute.


Relative to DExs, centralized exchanges still hold the edge in functionality because they offer many different features. The possibilities extend to margin trading, offered by liquid exchanges like Xena Exchange; pair trading; portfolio management tools; and advanced order types that significantly reduce risk.

Decentralized exchanges are not at that level because of their limited order types, the requirement for technical know-how, and the lack of margin trading in comparison to large centralized exchanges.


Centralized exchanges are more easily regulated than DExs. The former operate with official licensing and regulation as dictated by the relevant jurisdiction’s operator. On the other hand, DExs are more difficult to interfere with because of the distributed nature of blockchain. In a scenario where a government completely bans crypto trading, DExs have a better chance of survival and operation.


On the popularity front, centralized exchanges still enjoy the overwhelming bulk of crypto trade volume because they were first to carve their place in the market.

It is evident that there are areas in decentralized exchange operations that decentralized wallets and accounts have an edge. However, the popularity of centralized exchanges, despite the risk of a devastating hack, makes them dominant, as they have certain infrastructural advantages, including liquidity and the speed of order matching.

What is appropriate, therefore, is a decentralized exchange that leverages its possibilities while adding the competitive advantages offered by centralized exchanges. This means that an exchange that offers decentralization, low transaction fees, and instantaneous, trustless processing while adding the trading options and superior interface of centralized crypto exchanges will have an edge over competitors.

The Mitigating Security Solution of Xena Exchange

The most basic step to conveniently trading crypto is to find an exchange that actually caters to what you need. Xena Exchange offers a great deal of convenience to users. In addition to high speeds, ready support, and low fees, it offers a convenient platform that merges certain aspects typical for central exchanges with decentralized fund storage and segregation.

Decentralized accounts, or dAccs, are specifically designed to reduce counterparty risk. By slashing this risk by up to 90 percent and simultaneously allowing traders to enjoy the benefits of centralized trading thanks to fund segregation, the exchange ensures security and confidence. Because of the dAccs, currently used for Bitcoin collateral, the possibility of losing funds due to an attack or bug is drastically slashed.

Built using a proprietary clearing protocol with working principles similar to those of the Lightning Network, a dAcc is a basic client application for opening and closing channels to instantly transfer funds from a client’s wallet to a Xena Exchange account. Besides this ease of fund transfer, dAccs allow the end user to timely respond to margin calls.

Ultimately, dAccs provide the end user with additional possibilities they wouldn’t ordinarily enjoy on centralized exchanges while simultaneously offering lower transaction costs, better security, and low counterparty risks.

Bitcoin is still the crypto king, even with the rise of credible competitors like Ethereum and Ripple. In the past three years, Bitcoin has had periods of incredible price swings, and traders are always keen on making the most of a bull or a bear market. Accordingly, Bitcoin still dictates events in crypto exchanges. Some of the aforementioned centralized exchanges are even exclusively Bitcoin crypto exchanges.

The “hard” question now is whether or not Bitcoin is legal in the US. The answer is not so straightforward. First, the legal system in the US is fragmented, and laws vary from state to state. The main regulator, the SEC, has said Bitcoin is neither a security nor a commodity but that Bitcoin mining and investing is legal.

Meanwhile, the CFTC has classified Bitcoin as a commodity, meaning capital gains must be taxed and filed with the Internal Revenue Service (IRS). Furthermore, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) allows the use of BTC as money as long as the service rendered or goods purchased are legal.

That said, learning how to trade cryptocurrency is not complicated. With the proper tools and an intuitive interface, traders can significantly improve their skills.