The original idea of bitcoin was decentralized architecture. As more and more people started believing in cryptocurrency and with hundreds of altcoins, it became increasingly difficult to buy and sell cryptos for users. With this, there came an opportunity for companies to build exchanges and monetize on that. There are a lot of buzz words around us and today it’s imperative facts that you see and hear about crypto, and blockchain quite often. Even the conservative politicians have started accepting the fact that crypto is here to stay and it is changing the lives of many people. Often people don’t find the proper way to start the crypto journey and many of them get lost in the start by investing in Ponzi schemes. In order to bring the next billion users onboard and pass on the benefit of this amazing space, a lot of education needs to be done. Any user who is willing to start the journey should start from an exchange.
Why do we need exchanges?
Originally the holder of bitcoin was buying and selling directly from another crypto holder. This is called peer-to-peer trading. It was more like a barter system or they exchange it for real currency. But then, the trust factor was a major roadblock, and there came the peer-to-peer providers who were actually doing the escrow service. Even though this method was working fine, it was very slow and consumes a lot of time. This is where exchanges came in and they provided instant liquidity for a fee. Buying and selling cryptos became easy and you can just do it with your mobile. Exchanges became like a broker where they provided instant liquidity, security feature, and tools to manage hundreds of cryptocurrencies. This made the life of a crypto nomad simple and it also played a role in bringing mainstream users to the crypto world. Historical growth was achieved in crypto in the last few years and clearly, exchanges played the main role. There are three types of crypto exchanges: centralized (CEX), decentralized (DEX), and hybrid. Let me explain about each of them
Centralized exchanges or CEX have played a major role in the crypto market and they have bought millions of mainstream users on board. But in recent times they have been portrayed as insecure and blamed for changing the original decentralized idea of bitcoin. Many hack-related incidents Mt. Gox, Coinbene, Cryptopia have added to the flame and many are using the service because they don’t find good alternatives in decentralized exchange. But it’s worth noting that large exchanges like Coindesk, Binance were successful in thwarting this kind of incidence and they have been secure till now. They have become more technologically advanced and have incorporated the corporate culture and become more monopolistic. But this doesn’t mean we can blame them for what they have become, they have filled the gap and played a vital role in building the crypto sector.
Centralized exchange or CEX is a centrally managed platform where owners of the platform are responsible for the assets of the users. They generate and maintain the wallet’s private keys and they have to keep all the user’s private keys from hackers. They provide all the services in one central platform and provide a high level of performance, security features, customer support, and liquidity for trading pairs for many different crypto chains. You have no way to own your wallets and you simply rely on exchanges to keep your assets secure. The government likes them because they hold all user’s personal data and they can be held responsible for some mishaps.
Decentralized exchange or DEX is just a platform that facilitates users to manage different assets in various chains and networks. The user owns the private key and the wallet and the platform does not store any of the user’s private data. They provide one single platform to do the transactions in different chains using smart contracts and decentralized applications. Just like CEX users can find an array of features, but often they face fewer trading pairs, higher fees, slow transaction speed, poor customer service, and difficult procedures to exchange fiat currency and bring the money back to your bank account. Many early users find it difficult to use decentralized exchanges due to their complexity.
The main advantage of DEX is users maintain the private keys and the assets are in control of the users. There were many instances in centralized exchanges where the exchange had blocked the funds of users and this is something decentralized exchanges cant do. The transactions are happening directly on the crypto chain and this data is completely private to the users. Platforms like Uniswap and Pancake swap are offering users complete decentralized exchanges and they do not require any kind of registration and they are truly private. They claim that they can offer large liquidation and better security than centralized exchanges. It’s true that once you get used to them, you may find them fast, secure, and cost-effective.
Hybrid exchanges provide a combination of CEX and DEX. This type of exchange is still evolving and will definitely fill the gap in the future.
While selecting your type of exchange when investing, you should keep in mind the jurisdiction from where you invest, regulatory provisions, rules and regulations of your government, accounting and taxation practices, and your goals. Not a single solution might fit everyone, so it’s better to use a combination of different platforms for your needs.
If you are someone who is not tech-savvy, who wants to start with crypto investment, or wants to advance your investment in many new crypto projects then it’s better to take assistance from someone who knows the space and tech well. This will save a lot of money, and time and help you benefit in achieving your long-term goals faster.
Note: I am not providing any crypto-related investment advice. This article focuses only on knowledge transfer.
