How crypto exchanges work: order books, spreads and fees

Centralised and decentralised exchanges do different jobs

A centralised exchange, or CEX, is a company. You deposit funds with it, it keeps custody of them and it updates balances in its own database when you trade. Binance, Coinbase and Kraken are familiar examples. You trust the exchange to hold the assets, match orders fairly and let you withdraw when you ask.

A decentralised exchange, or DEX, is a set of smart contracts. You keep the funds in your own wallet and trade directly on the blockchain. On most DEXs there is no company-operated order book matching you with another trader; the price comes from an automated market maker pool instead. DeFi basics explains that side in more detail.

How order books and AMMs set prices

On a typical CEX, buyers post bids and sellers post asks in an order book. When the prices meet, the exchange matches the trade. The best bid and best ask define the live market. Deep order books on major pairs usually mean small trades move the price very little.

On a DEX, the price is often set by the ratio of tokens in a liquidity pool. When you buy one token from the pool, you leave more of the other behind and the price shifts. The larger your trade compared with the pool, the more the price moves against you. That is why a small swap on a major pool may be fine while the same size on a thin pair can be very expensive.

Spread and slippage are real trading costs

The spread is the gap between the best available buy price and the best available sell price. If a coin is quoted at $100.00 bid and $100.20 ask, the spread is $0.20, or 0.2%. Enter with a market order and leave a moment later, and that spread alone leaves you down.

Slippage is the difference between the price you expected and the price you actually got. It is common on DEXs, where the trade itself moves the pool price, and it also appears on thin order books where there are not enough orders at the top price to fill the whole trade.

Maker, taker and withdrawal fees

Most centralised exchanges charge maker and taker fees. A maker order adds liquidity by resting on the book; a taker order removes liquidity by trading against what is already there. Taker fees are often higher because instant execution is more convenient.

DEX fees are structured differently. The protocol usually charges a pool fee, such as 0.05% or 0.30%, which is paid to liquidity providers. On top of that you also pay the network fee for the transaction itself. Then there are withdrawal fees: a CEX may charge a fixed amount to send funds out, which can be a large percentage if you are withdrawing a small balance.

What proof of reserves can and cannot show

After the FTX collapse, many exchanges began publishing proof of reserves: wallet addresses and a cryptographic check that customer balances are included in the total liabilities shown to the auditor or exchange. That can be useful evidence that the assets exist at that moment.

What it does not show is just as important. It does not prove that the exchange has no debts elsewhere, that it can meet a bank-run scenario, or that it has strong internal controls. Proof of reserves is better than blind trust, but it is not the same as a full audited balance sheet.

How to keep your trading costs down

• Compare the live market on markets with the quote you are being offered.
• Use convert as a neutral reference rate before accepting an instant-buy price.
• On a CEX, prefer a limit order over a market order when the pair is thin or the spread is wide.
• On a DEX, check the slippage setting and the network fee before signing.
• Before choosing an exchange, read its deposit and withdrawal fee table as carefully as its trading fee page.