Exchange

Key points

• An exchange is a platform that lets you buy, sell, and trade cryptocurrencies, whether between digital assets or against fiat currency.
• It brings buyers and sellers together, concentrating liquidity and letting the market price form from the orders placed.
• There are two main models: centralized exchanges, which custody users' funds, and decentralized exchanges, where trading happens directly between wallets.

What is an exchange?

An exchange is the market where digital assets are traded. It works as the meeting point between those who want to sell and those who want to buy, providing the structure to match these orders and record the trades. Most users go through an exchange to enter crypto, converting fiat currency into digital assets, and also to exit back to fiat.

How it works

On centralized exchanges, the platform maintains an order book with buy and sell orders and custodies users' funds in its own wallets. The user deposits, trades within the system, and withdraws whenever they want. This model offers high liquidity and a simple experience, but concentrates custody of the assets on the platform.

On decentralized exchanges, trading happens directly between users' wallets, through smart contracts, without an intermediary holding the funds. Many use liquidity pools and a mathematical formula to price trades, instead of a traditional order book.

In both models, the price reflects the balance between supply and demand at that moment, and liquidity depth determines how much a large order moves the quote.

Why it matters

The exchange is the practical entry point to the ecosystem. An expat who needs to convert reais into digital dollars typically does so on an exchange or a crypto on-ramp service, and uses the same infrastructure to convert back to local currency. The liquidity concentrated in these markets is what makes it possible to convert amounts at a predictable price. For those who trade frequently, the choice between a custodial and a non-custodial model depends on the balance between convenience, control over one's own funds, and acceptable risk profile.

Risks and limitations

On centralized exchanges, the user entrusts custody of the funds to the platform, which brings counterparty risk in the event of failure or mismanagement. On decentralized exchanges, responsibility for the wallet rests with the user, and operating mistakes cannot be reversed. Low liquidity in an asset raises the effective cost of trading.