With most exchanges, someone can take their fiat currency, such as USD, and exchange that into cryptocurrency, such as Ethereum or even stablecoins to be used with Decentralized Applications.
Crypto exchanges need some amount of funds in the variety of currencies they convert, and this is referred to as liquidity. The more liquidity an exchange has in a given currency, the more easily (and cost effectively) you’ll be able to convert to or from it.
Centralized Exchanges (CEX)
In traditional finance, exchanges have been centralized, and this is largely how the cryptocurrency space grew as well. A centralized exchange relies on an orderbook that is controlled by a business and often these exchanges share similarities to a stock market or securities exchange. A CEX’s orderbook is often limited to the subset of its users, and market makers who provide greater liquidity through OTC markets.
Decentralized Exchanges (DEX)
A growing alternative to centralized exchanges is the concept of decentralized exchanges. Instead of any one organization owning and funding the exchange, it relies on blockchain technology as infrastructure to maintain and manage the orderbook activity between buyers and sellers, usually referred to as Automated Market Makers (AMM’s).
There are several different technical implementations of the way DEX orders are filled, such as it can be a decentralized order book where applications broadcast buy and sell orders, or it could rely on liquidity pools with arbitrage opportunities to maintain a value peg. Funding a decentralized exchange is open to the market, so anyone can participate in, and get rewards from, like collecting on fees by providing liquidity to a pool.
Some popular AMMs include Uniswap, SushiSwap, and Curve.
Want to learn about a token that can't be traded? Read about Soul Bound Tokens.