1.- Explain in your own words what an Exchange is.
2.- Differences between Wallet and Exchange.
3.- Mention the advantages and disadvantages of DEX and CEX
4.- Have you used an Exchange before? Tell us about your experience.
When we talk about cryptocurrency exchange or cryptocurrency exchange, we refer to those digital platforms where users have the facility to exchange their cryptocurrencies for fiat money or for another cryptocurrency, these platforms work based on the current prices of the cryptocurrency market based on of supply and demand, based on this we could say that the exchange of cryptocurrencies is like the stock market of cryptocurrencies.
The main objective of exchange platforms is to allow the user or trader to participate in the market and carry out operations that allow them to obtain profits as a result of market price variations, exchange platforms have managed to improve the financial dynamics of cryptocurrencies , Currently through these it is possible to exchange cryptocurrencies for fiat or crypto money quickly and easily no matter where we are and with very low commissions compared to traditional exchange methods.
The Exchange works the same as the exchange houses we know, its function is to allow users to buy or sell their cryptocurrencies, for this it is necessary for the user to enter the request they will make:
In case of selling it is necessary to specify the amount of cryptocurrencies and indicate the price at which you want to sell, this request (Ask) is registered in the order book (orders book).
In case of buying there are two options, the first would be to search in the orders book for an order according to your needs or the second to create a Bids (order to buy) where we specify the amount available for the transaction.
To finish we enter the payment method, some of these methods can be: bank transfers, credit cards, debit cards, PayPal, among others; this varies according to the policies of each Exchange.
There are five types of exchange or Exchange, each one has different characteristics but they all coincide in their objective, to provide the user with the ease of carrying out their cryptocurrency purchase and sale transactions; Each of these platforms has tools that allow the user to make the best decisions, based on this we have:
- Centralized Platform (CEX)
In the centralized platforms or CEX (Centralized Cryptocurrency Exchange) there is a third party involved, the company, this acts as a mediator in the negotiations that are carried out within the platform; In this type of Exchange, users do not have privacy or access to their keys, it is necessary for the user to approve certain drivers such as KYC (Know your client) and AML (Anti-money laundering) to be able to access and operate within this type platforms. In this type of platform, the companies or mediators are in charge of setting the exchange rates and the commissions to pay for each transfer made within the platform, some of the most used centralized exchange platforms today have Binance, Coinbase, Bitfitnex , Bittrex, Kraken and Poloniex.
- Decentralized Platform (DEX) :
In decentralized exchange platforms or DEX (decentralized Exchange) transactions are carried out between users through the P2P system, so there is no mediator to control these transactions, these exchanges are developed in the blockchain through of Smart contracts; In this type of exchange, the commissions are established by the users themselves, which in most cases are usually very low or nil. Among the most used decentralized exchanges we have: Bitsquare, Changelly, EtherDelta, OpenLedger, 0x, ShapeShift and Waves, among others.
- Cryptocurrency Brokers :
This type of platform allows users to exchange their cryptocurrencies in a quick and easy process, they are especially aimed at novice users and their main objective is to guide the user to a reduced offer of cryptocurrencies. Some of the platforms of this type are Shapeshift and Changelly
- OTC (Over-the-Counter) :
This type of platform allows users to carry out point-to-point transactions between the buyer and the seller, so that the negotiation is direct between both parties. Some of these platforms are itBit, Kraken OTC Dexk or BitStocks.
- Cryptocurrency funds:
Cryptocurrency funds are not exactly an exchange platform, these funds are managed by professionals, here users can buy, sell, save or invest their cryptocurrencies and thus obtain profits thanks to the trading operations carried out by the administrators of the platform in the market with the resources available in the cryptocurrency fund, Grayscale is an example of this.
There are many users who are often confused when they talk about Exchange and Wallet, as we said before, the Exchange are those platforms where we can carry out the exchange of cryptocurrencies for fiat money or other cryptocurrencies while wallets or Wallet is a software that allows us to store our cryptocurrencies and manage their keys; However, there are companies that provide both Exchange / Wallet services so that the user has a wallet where they can manage their cryptocurrencies and also an Exchange where they can carry out their exchange transactions, Mercury Cash is an example of this type of company.
Now that we are clear that it is a wallet and an Exchange, it is necessary to mention how they differ between them:
| Wallet | Exchange | |
|---|---|---|
| Utility | They are useful to store our cryptocurrencies | They are useful for performing cryptocurrency exchange operations, whether for fiat money or other cryptocurrencies. |
| Functioning | They work like a digital wallet where we can store our crypto assets | They work like an online exchange house |
| Types of Connection | There are wallets called "Cold Wallet" that allow us to protect our cryptocurrencies without the need for an internet connection. | It is necessary to have internet access to be able to carry out exchange transactions. |
| Password reset | It is impossible to recover the keys from our wallet, so it is advisable to have them well stored because in case of losses the money cannot be recovered | It gives us the possibility to recover the password easily so that we do not run the risk of losing our money |
Advantages and disadvantages of the Centralized Exchange (CEX)
Advantage
- It is characterized by being a simple interface to use which benefits new users
- They provide greater liquidity so the user can easily and quickly carry out cryptocurrency exchange transactions, it also allows the user to have the possibility of buying cryptocurrencies at low prices and later converting their earnings into fiat money.
- Currently many of these exchange platforms allow the user to carry out purchase and sale transactions of cryptocurrencies with fiat money, payments can be through credit or debit cards, bank transfers or PayPal.
- They have a higher trading volume.
- These platforms provide faster transactions.
- It offers the user a greater variety of cryptocurrencies so that the user can choose the one that seems best to him to carry out his transactions.
Disadvantages
- The centralized exchange prevents the user from having control over their keys and cryptocurrencies, this can sometimes be risky for the user as they could lose their assets at any time
- In the CEX the user must place all their personal information and identity documents, this affects their privacy.
- There are high probabilities of being attacked by hackers since all the information is stored in a central server, which would make it easier for hackers to obtain the information of the users within this platform.
- In the event of system failures, the entire platform would collapse the server.
- The owners of these platforms can manipulate the prices or the volume of the operations that are carried out within it.
Advantages and disadvantages of the Decentralized Exchange (DEX)
Advantages
- Users are owners at all times of their assets, in this type of Exchange there are no third parties involved.
- There are no third parties involved, transactions are carried out between users using the P2P system (peer-to-peer)
- It allows users to set the exchange rates at the time of the transaction, thanks to the fact that they are carried out under the P2P system.
- The commissions in this type of exchange are very low or practically nil.
- The privacy of the user is paramount so they do not request personal information, preserving the anonymity of the users.
- It offers greater security because, being a decentralized system, the risks of being attacked by hackers are almost nil.
Disadvantages
- They are not straightforward so it could be difficult for new users to use.
- Compared to centralized exchanges, they offer less operability.
- By maintaining the anonymity of the user, there is a risk that the transactions carried out are illegal or fraudulent.
- The exchange of cryptocurrencies and tokens can only be from the same blockchain.
I have several experiences with Binance and Paxful exchanges but here I'll talk about only Binance exchange because it is the closest exchange in my day-to-day life. Before I joined the Steemit platform I didn't have any clear image of cryptocurrencies or e-money but fortunately, my friend told me about Steemit. After that, I often use the Binance account for my Steemit earnings.
This is all about my homework task and I have explained all the questions given on the task. I convey my special thanks to Professor for preparing this valuable task full of knowledge.
Thank You!