What are hybrid crypto exchanges?

Understanding centralised and decentralised exchanges

The cryptocurrency space has gained a lot of popularity over the past decade. From a niche interest, the crypto market managed to turn into a major financial market. Since the crypto space experienced such growth, it became necessary to develop various types of platforms where users can trade crypto assets efficiently. These platforms are called cryptocurrency exchanges. 

Thereby, the development of crypto exchanges refers to the process of building suitable platforms for trading cryptocurrencies. These crypto exchanges can be centralised, decentralised, or a combination of both.  

Before diving into the design of hybrid crypto exchanges, let's take a look at the main features of centralised and decentralised exchanges.

What are centralised crypto exchanges (CEXs)?

First, we have centralised crypto exchanges (CEXs). If we compare a centralised crypto exchange's main functions and features to a traditional financial exchange, we won’t find that many differences.  

A centralised crypto exchange (CEX) is the most widespread and traditional cryptocurrency exchange form. These structures have been modeled on traditional banking systems.

This type of crypto exchange includes an intermediary—the platform itself presents a middleman between buyers and sellers that stores and manages user funds in exchange for liquidity, advanced trading tools, and a wide array of crypto trading pairs. Users on CEXs cannot access their private keys and therefore, cannot control their funds.

A high level of liquidity means that trades are executed faster and more efficiently. This is very helpful when it comes to broad trades—funds can be shifted more efficiently without experiencing many price fluctuations. 

To learn more about liquidity providers in the crypto trading space, why not read this article: 'What is a Liquidity Provider in Cryptocurrency?'.

However, speed and efficiency come with some trade-offs- for example, centralised crypto exchanges encompass certain security issues. When users deposit funds with a CEX, they give away the custody of their assets and trust the crypto exchange that it will be able to protect these assets. It is unfortunate that even well-known centralised crypto exchanges are susceptible to malicious activities. 

Additionally, CEXs are susceptible to regulatory pressure. While the regulatory landscape of the crypto space is still evolving, which adds up another layer of uncertainty in the market, CEXs are more open to regulatory obligations which can lead to token delisting or freezing user accounts. 

What are decentralised crypto exchanges (DEXs)?

As the name suggests, decentralised crypto exchanges (DEXs) function without a middleman. The platform doesn’t assume the role of an intermediary and users are free to trade directly through smart contracts. 

A decentralised crypto exchange (DEX) is more secure than its centralised counterpart; additionally, it provides way more privacy since users keep their funds under their control. 

DEXs are in line with the blockchain ethos- they provide decentralisation, autonomy and transparency. These exchanges are mainly non-custodial, and users’ assets remain in the crypto wallets so there is no need to trust an exchange; users can easily avoid malicious activities attacking exchanges.  

Another positive feature of DEXs is their permissionless- anyone can trade without the need to go through procedures of acquiring approval from the intermediary. 

On the other hand, DEXs also come with trade-offs; their liquidity is typically lower which can lead to slippage. They are not beginner friendly since they require a higher level of knowledge regarding crypto custody management and blockchain technology. 

Hybrid crypto exchanges as the middle ground

Both CEXs and DEXs have their benefits and drawbacks which satisfy the needs of divergent users. While CEXs are a popular choice for users who seek high liquidity, functionality, and simplicity, DEXs are frequently chosen by users who value increased privacy and security. 

It is considered in the crypto community that hybrid exchanges could be the middle ground between the centralised and decentralised model by taking the best from both worlds.

What is a hybrid crypto exchange?

A hybrid crypto exchange can be defined as a crypto trading platform that encompasses features of both centralised and decentralised exchanges. The main purpose of the hybrid model is to offer the user-friendliness and high liquidity of CEXs as well as the increased security and privacy associated with DEXs.  

You probably wonder how this is even possible. Well, the main idea behind the hybrid crypto exchange design is to provide centralised elements for matching crypto traders and decentralised elements for crypto custody and trade execution. 

The hybrid model is relatively new, but it has been gaining popularity within the crypto community because of its potential to address the flaws of both CEXs and DEXs.  

To differentiate hybrid and decentralised exchanges from centralised exchanges, users must understand what distinguishes hybrid exchange systems from centralised and decentralised architectures.

What is hybrid crypto exchange development?

Hybrid crypto exchange development means creating a platform that combines traits of both centralised and decentralised platforms.  

Generally, the development process includes the integration of blockchain technology for decentralised aspects such as utilising smart contracts for automated transactions and centralised features for user interface management and order matching. 

By combining these traits, hybrid exchanges can provide a more balanced solution that satisfies the needs of many types of users and provides more efficient trading. The integration ensures that transaction speed is high along with increased security through decentralised elements. 

What are the main features of hybrid cryptocurrency exchanges?

An important trait of hybrid exchanges is user autonomy over funds since it eliminates the need to trust a custodian with assets. Like trading on decentralised exchanges, users can engage directly with cryptocurrencies in their digital wallets, ensuring a higher level of privacy and security. 

User-friendliness is a feature borrowed from centralised exchanges. Hybrid exchanges provide user-friendly interfaces and the overall simplicity provided by CEXs, which makes them more welcoming to new crypto traders. The hybrid model also tends to have higher liquidity than DEXs.  

The hybrid design encompasses several additional features such as atomic swap abilities, smart contract technology, and fiat integration. 

How does a hybrid crypto exchange work?

To answer this question, let's take a look at its underlying technology.

The foundation of many hybrid exchanges is a blockchain settlement layer which ensures that all transactions are recorded on a decentralised ledger. The hybrid model additionally utilises centralised components for order matching to be able to faster pair buy and sell orders. 

Other important technologies that should be mentioned are smart contracts used for handling transactions based on predefined criteria. Additionally, some hybrid exchanges offer off-chain order books for the gathering and matching of orders to happen outside the blockchain. 

The benefits of using a hybrid crypto exchange

One of the main advantages of hybrid exchanges refers to users being able to control their crypto assets without the need for an intermediary to act as a custodian. A hybrid exchange deals with vulnerabilities associated with CEXs by giving users independence over their funds. 

In contrast to DEXs, hybrid exchanges provide a higher degree of liquidity and scalability. One of the main attributes of hybrid cryptocurrency exchanges is linked to transparency and speed.

Risks associated with hybrid crypto exchanges

Since hybrid crypto exchanges are still in their early stages, there is a risk of regulatory uncertainty. Some of them operate in the grey area still, without adhering to all compliance requirements which poses a certain risk for investors. 

Even though they have been praised for their speed and security, hybrid crypto exchanges can be associated with high transaction costs. These hybrid platforms can charge more than their centralised or decentralised counterparts which can impact traders’ decisions and investment returns. 

Finally, since hybrid exchanges are a fusion of CEXs and DEXs, users cannot expect the same level of privacy they get on DEXs.  

Crypto traders must understand all potential risks before reaching any decision. In the crypto world, knowledge is the key. Take a look at available courses at our Learn Crypto Academy and start your crypto trading journey.