How Exchanges Work: Inside the Crypto Market Infrastructure

The financial market system is changing year by year. One of the biggest parts of these changes is played by the bigger players: exchanges. Traditional institutions continue to dominate, but Web3 exchanges created a new layer of DeFi and are rapidly gaining ground.

Both worlds now sit shoulder to shoulder, shaping how capital moves. They decide how liquidity forms, and how traders of every level interact with the market. Even if these systems look entirely different at first glance, they share one thing: they’ve become the gateways through which nearly every trade passes.

Most traders use exchanges every day without really knowing what’s happening under the hood. So let’s talk about that and describe all parts of an exchange.

Most traders see the order book as a list of numbers: bids, asks. So inside the exchange, it’s a constantly shifting ecosystem. So many beginners miss: price is just the surface. Depth is the story.

You might see a 0.1% spread and think the market’s healthy. Meanwhile, one slightly larger-than-usual order could wipe out multiple levels because liquidity is thin beyond the first few ticks. This is why slippage feels random.

Some exchanges also aggregate orders from market makers or external liquidity providers, which is why their books look smoother. Others rely on natural retail flow and end up with more volatility around micro-movements.

The matching engine is the quiet core of every exchange — the part no one ever sees, but everyone relies on. Think of it less as a simple program and more as the heartbeat that keeps the entire platform alive. Every order you place has to pass through this engine. It’s responsible for reading the order book, checking what’s available, pairing buyers with sellers, and updating the book in real time.

Most exchanges stick to FIFO (first in, first out) — because it keeps the process predictable and transparent. But there’s a whole spectrum of nuance behind the scenes. Some matching engines give subtle priority to market makers to encourage deeper liquidity. Others design routing rules that help high-frequency desks maintain their strategies without clogging the system. A handful even shape the flow intentionally, rewarding liquidity providers.

Maker/taker fees also tie directly to the matching engine’s logic. Makers add orders to the book. Takers remove them. Exchanges want more makers because it stabilizes everything. More stability equals more volume.

Liquidity is about presence. Most liquidity on major exchanges comes from market makers, not retail flow. These are teams (or algorithms) quoting both sides of the book, adjusting spreads, and making sure the price doesn’t look like a desert.

Then you have arbitrage desks syncing prices across Binance, Coinbase, Bybit, OKX, and others. They keep everything glued together.

Without these players, your charts would look like someone dropped them down a staircase.

A lot of new traders assume that when you market-buy BTC, the exchange magically pulls coins from some giant wallet and hands them over. Not quite.
Here’s the real flow:

This is why withdrawals sometimes pause during upgrades and why networks clog exchanges. You're trading inside the exchange’s own accounting system. That’s why due diligence matters more than most retail users realize.

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As exchanges grew from local hubs into global networks, they began to function less like stand-alone marketplaces and more like connective tissue for modern finance. What started as a handful of regional platforms slowly evolved into a web of liquidity routes spanning continents.

It was about giving people in volatile economies a practical way to move value when their banks couldn’t keep up. In places where inflation hits like a hammer or capital controls tighten overnight, having access to a reliable exchange can be a reason to use a “different” tool.

At the same time, the rise of institutional interest has pushed exchanges to grow quickly. What used to feel like retail-driven trading apps are now complex ecosystems supporting everything from derivatives desks to enterprise-grade custody. So the top exchanges are delivering, because they know that professionalism is the price of being taken seriously. So they knew that there was are audience to have. Now you see the world, where crypto has become a reasonable asset, even in long-term portfolios.

On centralized exchanges, trades settle instantly on internal books.

On decentralized exchanges like Uniswap, it's a whole different rhythm. Liquidity pools replace order books, slippage becomes a direct mathematical outcome, and LPs set the tone.

CEXs feel faster and smoother; DEXs feel transparent but sometimes unpredictable. Both have their place, but they solve different problems.

You're operating inside a complex market infrastructure that shapes price behavior. Once you understand the mechanics behind liquidity, order flow, and execution, the market stops feeling random and starts revealing patterns most traders never notice.