In a previous article, we briefly discussed the phrase Crypto exchange. We’ll look at how crypto exchanges work and the different sorts of crypto exchanges. Let’s get this party started.
Cryptocurrencies have been causing a stir throughout the world and revolutionizing the Fintech business. Investors should learn everything there is to know about cryptocurrency exchanges before investing in cryptocurrencies. Cryptocurrency exchanges are vital in the blockchain development sector. The cryptocurrency exchange acts as a middleman between buyers and sellers, allowing them to swap cryptos instantly. The parties involved in the transaction swap their cryptos for fiat and digital currencies.
They have registered at least 20 cryptos on the cryptocurrency exchange for smooth and well-established transactions. Multi-functionality exchanges are preferred by investors who want to generate high-end dividends from their assets.
What is Crypto Exchange?
A cryptocurrency exchange is a mediator, like a brokerage firm between a seller and buyer of cryptocurrency. Investors can deposit money for transactions using modes of payments like debit or credit cards, UPI, direct bank transfers, etc. The exchanges charge transaction fees or commissions for every trade executed.
An investor should research the exchange for their needs. They must explore the exchange’s credibility, history, and trading benefits.
The main types of crypto exchanges are centralized cryptocurrency exchange (#CEX) and decentralized cryptocurrency exchange (#DEX).
Centralized Cryptocurrency Exchange (CEX)
Centralized exchanges are the third parties between a seller and a buyer. The company operates and controls the centralized cryptocurrency exchange to offer more reliability. Amongst the total number of cryptocurrency transactions, almost 99% of trades go through centralized exchanges. Popular centralized exchanges are GDAX, Gemini, Coinbase, Kraken, etc.
Pros of Centralized Exchange:
1. User-Friendly: Centralized exchanges are gaining popularity as they offer a friendly way of investing and trading in cryptocurrencies. Using the centralized exchange is simple. Investors can log in to their accounts to make transactions and view account balances through websites and applications.
2. Reliable: The centralized exchanges offer an extra layer of reliability and security for trading and transactions. As it entirely developed these platforms, they provide more comfort to investors
Cons of Centralized Exchange:
1. Risk of Hacking: Centralized crypto exchanges have the holdings of the investors. Usually, these holdings are worth millions of dollars. The chances of hackers attacking are more in centralized crypto exchanges. For example, before the theft, Mt Gox was the world’s largest crypto exchange. They reported the theft of 850000 bitcoins.
2. Transaction fees: The centralized crypt exchange transaction fees are high for convenience and services. This cost is high in the case of trades in high volume.
Decentralized Crypto Exchange (DEX)
Industry experts describe decentralized crypto exchanges as peer-to-peer marketplaces as they connect buyers and sellers. On DEX, the users have complete control over their holdings with their private keys for performing transactions. The smart contracts on the DEX are self-executing under pre-defined conditions. The blockchain ecosystem records each transaction.
Decentralized crypto exchanges are speeding up the market for digital assets and developing new financial products.
Pros of DEX:
1. Custody: The investors’ holdings on DEX are not custodial. It does not require investors to give private key rights to DEX for transactions. Investors can use external wallets with private keys with DEX through smart contracts. The terms of the contract are pre-defined. In the case of centralized exchanges, investors relinquish their custodial rights with the exchange, thus increasing the risk of hackers.
2. Diversity: There are many cryptocurrencies on decentralized exchanges. The decentralized crypto exchange often lists the cryptos with adequate trading activities, effective security standards, and prevalence for ensuring legal compliance and profitability. Most altcoins are traded on the exchanges, and P2P transactions are possible even with low trading volumes.
3. Lower Fees: As DEX uses self-executing smart contacts, there is an absence of an intermediary. DEX exchange, like Uniswap, charges low fees of around 0.3% compared to CEX. The transaction cost is lower than centralized exchanges in response to network utilization.
4. Trustless Transactions: Every transaction is recorded and overseen in CEX by the central controlling authority. But with DEX, trades are executed through smart contracts and recorded on the blockchain ecosystem, enabling trustless transactions. As DEX does not hold investor funds, the risk of hacking is low.
5. Privacy: In the case of DEX users, there is no need to disclose private keys as the exchange does not hold wallets or funds. Thus, there is no requirement for AML and KYC procedures. Even though it is convenient for investors, it might create problems from a legal perspective.
Cons of DEX
The cons of DEX significantly influence the user experience, scalability, capital mobility, and market liquidity.
1. User Experience: As DEX is at the developing stage, the users who are not familiar with the decentralized blockchain system might face difficulties. The first step for investors is to adopt the external wallet system to interact with DEX. They need to pump in funds in the wallet using Cryptocurrency or fiat money. Next, they need to link their wallet with DEX. In comparison, using a centralized exchange is a much easier process.
2. Liquidity: As DEX supports diverse trading pairs, it affects the market’s overall liquidity. In the Defi segment, market liquidity is increasing remarkably.
3. On and Off-Ramp: DEX does not support the purchase of digital assets using fiat currency like USD or allow fiat trade or making withdrawals from the bank account. Stablecoin technology is emerging for replacing fiat with the Defi ecosystem.
Conclusion: Both kinds of crypto exchanges have their pros and cons. The centralized crypto exchanges are simple to use for investors but have hackers. Whereas decentralized crypto exchanges are more secure, they are not very user-friendly.
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