When we buy/ sell bitcoin through some exchange say "Koinex in Indian context", what is the process i.e. actually followed ? 1. Does exchange communicate to node(s) in the bitcoin blockchain thru my public address on my behalf or 2. My browser directly communicates with node in blockchain which then broadcast it across bitcoin blockchain or 3. Exchange itself is a node in the network and to which i am communicating and it is broadcasting my transaction in the network
When we buy/ sell bitcoin through some exchange ... what is the process
The answer to your question is number 3.
Exchange itself is a node in the network and to which i am communicating and it is broadcasting my transaction in the network
why my balance gets updates instantly in exchange?
Some currency exchanges (and BTMs) just send your BTC to whatever Bitcoin-address you give them. This is subject to the usual Bitcoin block production timing. If the exchange subsequently goes bust you lose nothing.
Other exchanges act like a bank, rather ironically. They insist you open an account with them and just change a number in your account without actually performing any Bitcoin transactions. The number shown as the balance in your account basically says that is the amount they owe you (not the amount you own as far as the Bitcoin network is concerned). This is arguably the most risky way to hold Bitcoin (other than for someone who trades currencies several times a day). If the exchange subsequently goes bust you lose everything.
As the wise folk say: "No Private Key - No Bitcoin".
how can be ensure we are not duped by second type of exchange?
There is no infallible way to ensure you are not duped by the second type of exchange (or by criminals hacking that exchange). Such exchanges are inherently absurdly risky. Remember MtGox, MyBitcoin, Bitcoinica, Neo & Bee, Bitinstant, NiceHash, Moolah, Cryptsy etc. Peruse this website
Don't just assume that a unique string they shared with you is a private-key. Verify that it is by importing it into a standalone wallet and checking the balance (then delete the wallet and clean unused space on the hard disk or Flash memory)
The only sensible action, if you plan on keeping Bitcoin for more than a day or so, is to immediately transfer "your" bitcoin into a paper-wallet (which you generated privately, not generated through some online website) or into a hardware-wallet (directly purchased from the manufacturer) that only you control and which no-one else has ever touched or seen.
If you need to constantly see your Bitcoin balance, set up a watch-only wallet. That way your private-keys are never exposed to the thousands of fanatically determined criminal hackers roaming the Internet.