What are crypto exchanges?
Crypto exchanges are online marketplaces where users can buy and sell cryptocurrency. Like a traditional stock exchange, crypto exchanges allow you to onramp to Crypto from fiat, store cryptocurrency, trade one cryptocurrency for another, or even convert cryptocurrency into your local fiat currency.
Some of the best crypto exchanges today are Coinbase or Coinbase Pro, Binance, Kraken, and Gemini. These exchanges usually have the highest trading volume and liquidity and have become popular trading platforms for crypto traders.
Crypto exchanges are an innovative way for users to exchange crypto. Before crypto exchanges came into being, crypto mining was the only way to acquire more of a digital currency. This complex method requires advanced software, high-end hardware, and technical know-how.
Crypto exchanges today offer a vast selection of crypto assets, including NFTs (non-fungible tokens), smart contracts, dApps (decentralized applications), and DeFi (decentralized finance) products.
Crypto exchanges vary depending on the services they offer. However, a common practice all users find themselves doing is paying cryptocurrency exchange fees, which—often referred to as transaction or trading fees—can be high or low depending on the crypto exchange you’re trading on.
But first, let’s look at why exchanges charge fees and how they differ from other types of fees in the crypto ecosystem.
Why do crypto exchanges charge fees?
Crypto exchanges charge fees to remain sustainable and profit from facilitating transactions, which is why they usually charge a small percentage of each transaction to make money and keep the exchange functional.
The portion of your transaction taken by crypto exchanges is often a predetermined amount. Some exchanges have variable fees depending on the market's volatility at the time, but you'll find many exchanges that usually charge a fixed percentage of any given transaction.
Percentages can range from 0% to 1.5% of the transaction, and even this can change if you're the buying or selling party. Additionally, the costs may vary based on the cryptocurrency itself.
What causes crypto exchange fees?
Crypto exchanges charge fees whenever you buy, sell, or move crypto within their platforms. Exchange fees differ depending on the type of exchange you’re trading on. However, not all fees on crypto platforms are the same. Exchange fees are different from gas or network fees. These fees are more blockchain-specific for networks like BTC or ETH, which are decentralized platforms. However, if exchanges must pay gas or network fees, they will often pass the cost onto their users.
Central authorities don’t regulate decentralized platforms, so all fees paid on these networks don’t go to third-party entities. Instead, any fees you pay here occur on-chain and often go to miners who mine new blocks on the blockchain.
The amount you pay varies based on the blockchain and the number of transactions added to a block. Transaction fees—also called miner fees—are intended to incentivize miners to use their resources to generate and validate new blocks. They keep the systems secure as without them, there would be no incentive to be a miner /staker.
Decentralized exchanges facilitate crypto transactions for blockchains and function differently from the most popular centralized crypto exchanges. Let’s understand the difference between both and how their charges differ from each other.
Fees in CEXs vs. DEXs
Crypto exchanges are of two types—centralized exchanges (CEXs) and decentralized exchanges (DEXs). CEXs usually charge fees to fund their operations, while DEXs act as media to trade on-chain to recuperate network or gas fees. Fees typically vary depending on the assets traded.
Centralized exchange
A CEX offers two parties a neutral venue to conduct a transaction. Centralized organizations frequently run CEXs. Users' transactions are often maintained as a database record and don't interact with blockchain networks. That’s because using the blockchain requires payment for mining and validator efforts.
CEXs have interfaces that are easier to understand and use and are similar to conventional financial apps and stock exchanges. Since there's no interaction between transactions and the blockchain, users don’t have to pay gas fees. As a result, CEXs tend to be low fees as they're imposed purely for profit.
Decentralized exchange
Users can conduct transactions on a DEX without the intervention of intermediaries, making DEXs the preferred option for many. They offer open-source data and are trustless, enabling users to maintain complete control over their funds. DEX users can also be pseudonymous, which means their identities are kept private, but all transactions go to and from a crypto wallet linked to their pseudonymous account.
Based on the given blockchain, DEXs may have higher or lower fees than CEXs. However, DEXs are generally more challenging for non-technical people to operate. They also offer little-to-no security during money loss like a hack or cyberattack, or even if the funds are misplaced or sent to the wrong user.
DEXs are more effective for those with a more advanced understanding of decentralization. However, it’s important to note that DEXs don’t allow you to convert your fiat currency into crypto and vice versa. To convert currency, you’ll have to use an on-ramp.
On-ramp fees
On-ramps are a method to promote accessibility and lower the entry barrier for investors looking to get into cryptocurrency trading. The easiest route to start participating in the cryptocurrency market is to invest, which entails purchasing coins using fiat currency. Most individuals conduct these transactions online.
Since not all exchanges permit direct fiat conversions, on-ramps allow you to receive crypto in exchange for your fiat currency, which you can then use to transact on crypto exchanges.
In short, on-ramps link fiat and digital currency and allow you to add money to a platform to buy cryptocurrency.
Withdrawal fees
On-ramps act as the bridge between fiat currencies and the crypto world, allowing you to exchange and convert each for the other. But what if you’d like to withdraw your earnings to your bank account to use in the real world? Doing so is entirely possible, but you’ll have to pay withdrawal fees, which are usually fixed amounts and the fee structures are entirely dependent on the crypto exchange you’re using. Crypto exchanges usually impose these when you move cryptocurrency out of an exchange.
Wrapping up
Learning about crypto fees can become a strenuous activity, as you compare each exchange, analyze its services, and decide which is best for you. After that, it’s about choosing a cryptocurrency and spending your hard-earned money on a digital asset you hope will help you reap benefits in the future.
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