What is a crypto exchange?

A crypto exchange is a place where you can trade cryptos for other cryptos or fiat money ($/€/...) by using a third-party trading provider. Common platforms for centralized trading are Binance and Coinbase.

How does it work

A centralized exchange is a company or platform that provides you with tools to trade crypto assets. You will likely need a verified account at that exchange to trade.

You first need to send your cryptos to the centralized exchange platform. That means the cryptos really leave your wallet and are no longer under your "real" ownership. The crypto exchange receives your tokens and credits them virtually to your account. At a centralized exchange you only own virtual cryptos. The exchange just saves in its database, that you sent them a certain amount of that crypto, but you no longer own the crypto on the real blockchain. They do this in order to allow for quicker and much cheaper trades, as the trades do not have to occur on the real blockchain anymore, which would take much more time (minutes for Bitcoin for example). You can use the platforms special trading tools to do that. Everything occurs only inside of the exchange platform, it just administrates the amount of cryptos each user owns inside its database.

At any time you can opt to send your cryptos back to a real crypto adress, to own them on the real blockchain again.

Risk

As already mentioned, crypto exchanges have the risk, that you need to send them your cryptos. As long as the cryptos are on the exchange platform, you only own them virtually on that platform but not on the real blockchain.

In case the exchange company becomes hacked, gets shut down or their servers get destroyed, your cryptos remain inside the company or may be lost entirely and you won´t have access to them.

The benefits on the other side are also quite comfortable: easy, quick and cheap trading as well as the possibility to trade your cryptos for fiat money, which you cannot do on decentralized exchanges. If you owned Bitcoin on the blockchain and you would like to sell those for dollars, you would send them to a trustworthy exchange like Binance or Coinbase. Those will virtually credit the coins to your account, from where you can trade them for real dollars. These dollars you could then choose to pay out to your real bank account.