Explain in your own words what an Exchange is. Differences between a Wallet and an Exchange. Mention the advantages and disadvantages of DEX and CEX. Have you used an Exchange before? tell us about your experience.
Explain in your own words what an Exchange is.
An exchange is an online platform that allows you to exchange a digital asset for another based on its value in the current market so it allows you to exchange our cryptocurrencies for traditional money, send remittances, make payments, and many more options depending on the exchange.
For example, there are exchanges that allow you to pay for additional services such as telephone lines, buy gift cards and even earn money by storing our cryptos in them, the latter is known as staking.
Now we know that exchanges are exchange platforms and currently there are two types that have been the most popular, traditional and Peer to peer (P2P)
Traditional, traditional exchanges are usually quite simple to handle since they work in a similar way to an exchange house, where you place an order to sell or buy Cryptocurrencies to the platform and it will provide you with the exchange rate of the moment and the exchange methods to make said exchange.
Peer to Peer (P2P), as its name says, negotiations are carried out directly from person to person through the platform, so it generates the benefit of having direct contact with the seller or buyer, and you can also establish your own exchange rate as is the case of a well-known platform worldwide "Binance"
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Differences between a Wallet and an Exchange.
Advantage of exchange.
• Has stated earlier, exchange helps the cryptocurrency trader to make more profit, in that he buys at low rate and sell at high rate.
Disadvantages of exchange.
• Imagine a trader buying at low rate and he or
shee is face with immediate needs such as
emergencyy, the market is volatile which meann the coin may be even lower than what he actually bought and if he sells at that moment it will be a great lost.
Differences between a Wallet and an Exchange.
wallet
• In wallet, the trader here instead of trading or marketing of coin just keep it(save) in the wallet
• Wallet is decentralized and by this it means there is no involvement of any central authority or third party when the individual want to perform transaction
• peer to peer user transaction is being performed here
• when we talk about wallet, it has a higher level of security which makes it strong and trusted because the user will be certain that with the strong security it will not be hacked
• Here, the user can perform as many transaction he wants to, no limitations
• Here, the user is being given both the private and public keys
Exchange
• In exchange, the trader here trade the coin he may buy and also sell it but will not save.
• There are 2 type of exchange the centralized( third party involved) and the decentralized exchange(no third party)
• Exchange can be done in financial institutions
• Unlike wallet, the exchange has low security due to third party that can monitor your account and may probably hack it.
• Here the user is limited in transaction.
• It is the user that freely choose the key.
Mention the advantages and disadvantages of DEX and CEX.
DEX
Decentralized exchanges are digital markets where financial securities are traded through a P2P without third parties. In other words, the decentralized ledger takes the place of a third party.
DEX uses smart contracts to execute market transactions by allocating transactions to autonomous codes.
Examples of Dex include; WavesDex, Bancon Protocol, Kyber Network, Ether Delta, Air Swap, Uniswap, Justswap among others.
ADVANTAGES
• No KYC or ID verification
DEX are trustless and the privacy of the customers is well protected. One can have an account without having to provide personal information.
• No counterparty risks
The possibility of theft, loss of funds and hacks is greatly reduced. This is because, users are directly interacting with eachother without middlemen and all information regarding any transaction is recorded on the blockchain. This also prevents price manipulation.
• No counterparty risks
The possibility of theft, loss of funds and hacks is greatly reduced. This is because, users are directly interacting with eachother without middlemen and all information regarding any transaction is recorded on the blockchain. This also prevents price manipulation.
• All tokens can be traded
DEX caters for all cryptocurrencies whether new or old. This gives users a wide variety of cryptocurrencies to choose from in order to trade. Therefore, Dex are diverse.
• Freedom
This arises due to the fact that there are no third parties involved. Users hereby have the freedom to move their digital assets around in which ever way they see fit.
• Security
DEX store data of all the transactions on many servers across the world. This makes it impossible for data to be manipulated.
DISADVANTAGES
• No recovery ability
Remember that with Dex, there is no KYC ( know your customer). This means that a user can have an account on the exchange without providing their personal information. Irrespective of the fact that a user's privacy is protected, it also has a down side. This is because; in the event that a user loses or misplaces their funds, they cannot recover them due to the aspect of "No KYC".
•Low liquidity
DEX faces a problem of low liquidity. This is mainly because they are new.
•Limited speed
This is entirely dependant on the network's miners rather than the exchange.
• Scalability issues
This issue is caused by the congestion of the network. DEX is user friendly and thus attracts many new traders. The large number of miners using the network lead to congestion and reduces the speed. This eventually affects the scalability of Dex
CEX
Centralised exachanges operate like a bank .. there is an owner and they follow rules and regulations. The company that owns the exchange has full control over everything that takes place on the exchange.
ADVANTAGES
• Security against criminal activity
CEX are protected from criminal activities because they complete KYC, anti- money laundering and counter terrorism financing checks.
• Volume
They account for the last majority of trading volume.
• Transparency
CEX have developed public and institutional trust because they work with regulators and employ tight security.
• Offer digital wallets for customers to store their cryptocurrencies
DISADVANTAGES
•Custody
A user entrusts his private keys with the exchange therefore, he has no control over his funds.
• Hacking risks
CEX are run by companies and they are responsible for the assets of their clients, this makes them highly pron to cyber attacks.
• The privacy of the users is not protected. This is because of the presence of the Know Your Customer (KYC) that requires users to provide their personal information.
• Information can easily be manipulated. This is because the users have no say in what happens on the network. Everything is controlled by the owners of the network.
Have you used an Exchange Before?
Yes, I have used Binance Exchange before. It is a good exchange. It has almost all Cryptocurencies in many pairs.
It's working mechanism is also smooth. It's deposit and Withdrawal is also very fast and It has low trading fees.
Screenshot from Binance
Conclusion
Thanks professor @stream4u for this article. Exchange are most important in trading. There are so many exchanges available in the market.