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.
What Is An Exchange?
In the world of cryptocurrencies, a Cryptocurrency exchange, is an online platform/market where people meet to either exchange their cryptocurrency to other Cryptocurrencies, or to exchange their cryptocurrency to fiat currency.
These exchanges exist because cryptocurrency exists. Remember that Cryptocurrencies are digital and virtual. Therefore, there can be traded only through an online medium.
Exchanges therefore act as middlemen between buyers and sellers. Exchanges link up buyers and sellers and when transactions are completed, they earn a fee. Other common features of an exchange include:
• Most Exchanges especially Centralised ones support a P2P system. But even then, personal information concerning the buyer and seller is not disclosed so as to guarantee safety of users.
• With an exchange, there is the possibility of converting crypto currency from one currency to another. For example, Bitcoin can be converted to Ethereum. Cryptocurrency can also be converted to fiat currency.
• A user of an exchange, can earn money without actually trading Cryptocurrencies. For example, staking.(where an individual saves and earn interest.)
We can see that exchange is very vital for cryptocurrency transactions, as it can be said to be the cryptocurrency market place.
Differences between a Wallet and an Exchange.
| A Wallet | An Exchange |
|---|---|
| Wallets use private keys which cannot be recovered if they are lost. | An Exchange uses passwords which can be recovered when it is lost. |
| Wallets do not provide any facilities for trading of Cryptocurrencies. | Users of An Exchange, enjoy facilities which allows them to trade Cryptocurrencies. |
| Wallets provide more security, since the keys remain with the owner | It is very easy for an exchange to be attacked by hackers. |
| The primary purpose of a wallet is to safeguard/store digital assets. | The primary purpose of an exchange is to facilitate trading from one digital asset to another/fiat currency. |
| In the case of a wallet, individual owners have full control over using and transferring of funds. Owners of wallets also keep their private keys, and there is no limit to the amount of withdrawals. | With an exchange, we loss some of these freedoms since the exchange sets rules which we have to follow. Also, an exchange often imposes withdrawal limits. |
Mention the advantages and disadvantages of DEX and CEX.
Before giving their advantages and Disadvantages, it'll be good to first of all understand what DEX and CEX is all about
A Decentralised Exchange(DEX) is an exchange system in which a user has total control over their assets. In this system, users have private keys which gives them total control over their digital assets. A common example of a decentralised Exchange system is Uniswap.
On the other hand, a Centralized Exchange(CEX) is a system in which a user does not exercise complete control over their digital assets. This control is limited by the rules and regulations set by the exchange. An example of a Centralised Exchange is Binance.
Advantages and Disadvantages of Decentralised Exchange (DEX)
| Advantages | Disadvantages |
|---|---|
| It deals with private keys which are kept by the user. This makes it more secure as hackers cannot get your private key from the exchange. | If a user misplaces or forgets their private key, their digital assets could be lost forever. |
| There is no need for giving personal information or for KYC Identify verification. This makes it secure, as the exchange does not have our personal information. | There is low trade volume, low liquidity and lack of buyers and sellers in a DEX. This makes CEX better for trading. |
| A major advantage is that users have full control over their digital assets. | However, DEX platforms usually give very limited tools and features for users to explore. |
Advantages and Disadvantages of Centralised Exchange (CEX)
| Advantages | Disadvantages |
|---|---|
| A CEX system uses passwords, and these passwords can be recovered if they get lost | It is not secure as compared to DEX because passwords are also kept with the exchange, and hackers can easily get access to them. |
| There is high liquidity, a large number of buyers and sellers and a high volume of trade on a CEX | However, it usually requires the user to leave personal information with the exchange. This is through the KYC verification. |
| There are many more features and tools placed at the disposal of users which makes CEX better when compared to DEX. | However, users do not have full control and have to follow the rules of the exchange. |
Have you used an Exchange before? tell us about your experience.
I am a happy user of Binance exchange, and I don't have an intention of switching anytime soon.
Thanks for reading...
Hi @iloveakuma, Thank you for taking interest in the 5th Task of the Beginners Fixed Class. Your grades are as follows:
My Review and Suggestions:
You have completed the task.
You structure your article writing very well.
You didn't make conclusions, even though there are no rules about it, but you must make conclusions in each of your assignments.
You can add some supporting screenshots to make your explanation about your experience with exchange better.
Leave a space between each discussion for easy reading.
There are some grammatical errors, please pay attention to grammar before posting.
Thank you!
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