Cryptocurrency exchanges are platforms that facilitate the trading of cryptocurrencies for other assets, including digital and fiat currencies.
What are Cryptocurrency Exchanges?Cryptocurrency exchanges are platforms that facilitate the trading of cryptocurrencies for other assets, including digital and fiat currencies. In effect, cryptocurrency exchanges act as intermediaries between buyers and sellers and make money through commissions and transaction fees.\$100 can be exchanged for bitcoin of equivalent value on common cryptocurrency exchanges and vice-versa. Similarly, bitcoin worth \$100 can be exchanged for Ethereum of equal value. The same concept can be applied to different assets based on the exchanges offered.Centralised vs Decentralized Cryptocurrency ExchangesCentralised cryptocurrency exchanges act as a third party between buyers and sellers. Since a company operates and controls them, centralised exchanges offer more reliability. Approximately 99% of all crypto transactions go through centralised exchanges. Examples of centralised cryptocurrency exchanges include:
Coinbase
GDAX
Kraken
Gemini
Decentralised cryptocurrency exchanges (DEX) allow users to execute peer-to-peer transactions without needing a third party or an intermediary. Due to some of the issues associated with centralised exchanges, decentralised exchanges are preferred by some users.However, decentralised exchanges do not facilitate the trading of fiat currencies for cryptocurrencies. Examples of decentralised cryptocurrency exchanges include:
AirSwap
io
Barterdex
Blocknet
Advantages of Centralized Cryptocurrency Exchanges
User-friendly
Centralised exchanges offer beginner investors a familiar, friendly way of trading and investing in cryptocurrencies. Instead of using crypto wallets and peer-to-peer transactions, which can be complex, users of centralised exchanges can log into their accounts, view their account balances, and make transactions through applications and websites.
Reliable
Centralised exchanges offer an extra layer of security and reliability for transactions and trading. By facilitating the transaction through a developed, centralised platform, centralised exchanges provide higher comfort levels.Disadvantages of Centralized Cryptocurrency Exchanges
Hacking risk
Centralised exchanges are operated by companies responsible for the holdings of their customers. Large exchanges usually hold billions of dollars worth of bitcoin, making them a target for hackers and theft.An example of such an incident is Mt.Gox, which was once the world’s largest cryptocurrency exchange company before it reported the theft of 850,000 bitcoins, leading to its suspension.
Transaction fees
Unlike peer-to-peer transactions, centralised exchanges often charge high transaction fees for their services and convenience, especially when trading in large amounts.Advantages of Decentralized Cryptocurrency Exchanges
Mitigating hacking risk
Users of decentralised exchanges do not need to transfer their assets to a third party. Therefore, there is no risk of a company or organisation being hacked, and users have assured more excellent safety from hacking and theft.
Preventing market manipulation
Due to their nature of allowing for the peer-to-peer exchange of cryptocurrencies, decentralised exchanges prevent market manipulation, protecting users from fake and wash trading.
Anonymity
Decentralised exchanges do not require customers to fill out know-your-customer (KYC) forms, offering privacy and anonymity to users.Disadvantages of Decentralized Cryptocurrency Exchanges
Complexity
Users of decentralised exchanges must remember the keys and passwords to their crypto wallets, or their assets are lost forever and cannot be recovered. Unlike centralised exchanges, they require the user to learn and get familiar with the platform and the process, which offer a more convenient and user-friendly process.
Lack of fiat payments
Decentralised exchanges do not allow for trading fiat currencies for digital ones, making them less convenient for users who do not already hold cryptocurrencies.
Liquidity struggles
Some 99% of crypto transactions are facilitated by centralised exchanges, which suggests that they are accountable for most of the trading volume. Due to the lack of volume, decentralised exchanges often lack liquidity, and it can be challenging to find buyers and sellers when trading volumes are low.
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