Cryptocurrency trading these days is incomplete without cryptocurrency exchanges. From the time Bitcoin was bought and sold on forums, there are now specialized platforms that facilitate the sale and purchase of hundreds of cryptocurrencies. The majority of the crypto trading is done on centralized exchanges which are akin to brokers in the stock market.
Several decentralized exchanges have also come up where users can trade directly with each other without any third-party involvement. However, the platforms of both types face specific problems that limit their appeal to traders.
Now, we see the development of hybrid cryptocurrency exchanges that combine the positive aspects of both exchange types to deliver a better trading experience. This article will help you get a better understanding of hybrid crypto exchanges, their features, and what differentiates them from centralized and decentralized exchanges.
Centralized Cryptocurrency Exchanges
Before talking about hybrid cryptocurrency exchanges, we need first to understand centralized and decentralized exchanges. Coming to the former, centralized crypto exchanges(CEXs) are like brokers in the crypto market.
These platforms act as intermediaries that match crypto buyers and sellers. They also often act as custodians of your private keys and by extension, your crypto assets. Convenience and accessibility is the most significant advantage of CEXs as they enable users to instantly buy crypto with either fiat or other cryptocurrency. This is a big reason why the majority of crypto trading takes place through centralized exchanges.
Most leading CEXs have their own crypto wallets in which you can deposit money(fiat or crypto) for trading on the platform. Further, while trading on a CEX, it is the exchange that is responsible for all aspects of digital trading: from vetting tokens to regulatory compliance to consumer protection and maintaining fair prices.
Most CEXs have mandatory registration and KYC verification requirements in order to comply with the local regulations of the territories in which they operate.
Decentralized Cryptocurrency Exchanges
Decentralized Cryptocurrency Exchanges(DEXs) are peer-to-peer(P2P) marketplaces where crypto buyers and sellers directly interact with each other and conclude trades. These are non-custodial platforms where traders maintain control over their private keys and trade on the platform with an external wallet.
DEXs don’t ask for any identifying information from their users letting them trade crypto while maintaining their privacy. They eliminate the need for intermediaries by employing self-executing smart contracts for facilitating crypto swaps. This system is known as Automated Market Maker(AMM) and most leading DEXs use it to provide liquidity to the platform and enable crypto swaps.
When trading on a DEX, you have to pay both a network fee and a trading fee. The network or gas fees are the cost of the transaction on the blockchain while trading fees are levied by the exchange. Generally, the major proportion of the trading fees collected is given to liquidity providers as a reward for providing liquidity.
However, DEXs and AMM-based DEXs in particular, often suffer from the problems of slippage and impermanent loss. The possibility of slippage is higher in the case of large orders. Impermanent loss affects liquidity providers when one asset of a specific trading pair is more volatile than the other.
Hybrid Cryptocurrency Exchanges
Hybrid crypto exchanges combine the features of both CEXs and DEXs to create a specialized platform that addresses the limitations of conventional crypto trading platforms. These exchanges offer the convenience and liquidity of centralized exchanges and the anonymity and security of decentralized ones.
Here, a centralized database matches crypto traders while the storage of tokens remains decentralized i.e. the users retain control of their funds and do not hand them over to a custodian as is the case with CEXs. In other words, the matching engine is centralized and the custody of funds is decentralized on a hybrid cryptocurrency exchange. They are fast and have high liquidity like CEXs and at the same time, are more scalable in comparison to DEXs.
Features of Hybrid Cryptocurrency Exchanges
This means that a whole order book can be set up from a third-party exchange. This improves the flow of crypto trading on the exchange thereby, encouraging users to flock to the platform.
Hybrid exchanges use the escrow method to safely keep crypto assets as per the needs of crypto buyers and sellers. This helps in ensuring the security of transactions as funds are transferred from one party to another only when the contractual requirements are fulfilled.
Hybrid crypto exchanges often have multiple liquidity options and top-grade authentication and security measures for a seamless trading experience in a secure environment.
Atomic Swap Exchange
In an atomic swap, cryptocurrencies from different blockchains are exchanged without the involvement of a third party. This gives token owners complete control over the transaction. However, a special wallet might be needed to execute an atomic swap.
Hybrid Cryptocurrency Exchange Benefits
The biggest advantage of hybrid exchanges is the convenience of trading on them. They support both cryptocurrencies and fiat currency making it easy to trade different types of assets or instantly buy crypto with fiat in one place.
Hybrid exchanges have much more liquidity in comparison to DEXs. They often have multiple liquidity options and a central matching engine like CEXs for fast and successful transactions. High liquidity helps ensure that spreads remain low and users are easily able to buy and sell huge amounts of cryptocurrency.
Advanced Trading Tools
Many hybrid exchanges offer advanced trading tools such as margin and futures trading, stop loss orders, and other tools that would be more lucrative for experienced traders rather than simple crypto swaps.
You need to have some prior crypto experience to make sense of trading on a DEX. In comparison, hybrid exchanges are much more beginner-friendly with user-friendly interfaces, multiple coins, and fiat gateways.
Customer support makes a big difference in the way users perceive a platform. On a DEX, users are largely on their own as these platforms have no grievance redressal mechanism. However, hybrid exchanges have customer support to address user queries and help them with any problems that they face on the platform.
Examples of Hybrid Cryptocurrency Exchanges
Qurrex is a hybrid cryptocurrency exchange combining decentralized networks with centralized nodes to provide institutional-grade services. The firm is based out of the Netherlands and the Cayman Islands. Qurrex uses both on-chain and off-chain protocols to process transactions. Along with providing white-label services for entrepreneurs, it also has a broker internalizer system to connect white-label crypto exchanges to a single centralized one.
Further, Qurrex has fiat integration, a native QRX token, cold storage for user assets as well as insurance for hot wallets. It also offers advanced APIs and 24/7 customer support.
Eidoo is both a multi-currency wallet and a hybrid exchange. In a move that differentiates it from other platforms, Eidoo has allowed the swap of ERC-20 and ERC-223 tokens. However, you cannot trade completely anonymously here. The platform complies with AML regulations so you may have to provide your ID and disclose the source of your funds.
The Eidoo wallet is non-custodial and your private keys remain with you. They are not stored anywhere else or on another server.
Legolas is a hybrid protocol that integrates a decentralized ledger with its centralized platform. This not only ensures transparency but the order book being inalterable also provides a fair trading environment. Here, order matching is done off-chain while incoming orders are encrypted and time-stamped and stored in the blockchain.
This helps Legolas ensure transparent price formation and zero front-running. It is also a highly efficient and scalable platform, unlike decentralized exchanges that often have trouble while scaling up.
Hybrid cryptocurrency exchanges represent the best of both worlds. They combine the features of centralized and decentralized exchanges while addressing their limitations to provide the best possible trading experience to users. Hybrid exchanges are the next step in the evolution of the blockchain and crypto industry.
However, the technology is still being developed and refined and it remains to be seen as to what changes they would bring in the crypto trading scenario.