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.
The literal meaning of exchange is to get one thing by giving another which brings the memory of the traditional market system where we buy goods and services in exchange for money however since we are here in the crypto academy hence I will be talking about the crypto exchange.
The crypto exchange or DCE (Digital currency exchange) is a virtual marketplace for crypto traders where they buy, sell, and crypto assets through other crypto coins or by fiat money using their bank transfers or credit cards as you cannot buy crypto assets from regular markets or bank hence exchanges are placed to get yourself crypto assets.
Apart from trading exchanges can be used to hold assets too however for holding these assets digital wallets are more preferred. Some of the exchanges have their own built wallet where users store crypto assets. There are two categories of exchanges in crypto discussed below.
Decentralized Exchange
DEX or Decentralized exchanges are crypto exchanges that have no centralized party or authority instead transactions are placed using an automated system through a smart contract. It gives a sense of authority and privacy to users i.e. they have entire control over their private keys and assets. Since there’s no governing body hence transactions can be done at a low cost.
Centralized Exchange
Contrary to decentralized exchanges, centralized exchanges have the role of centralized authority involved in this type of exchange and possess high liquidity and trading volume. These exchanges can accept fiat money to purchase crypto assets and can be used to convert assets back to fiat money. It exhibits a user-friendly interface and involves no complicated feature that makes it difficult to operate.
Differences between a Wallet and an Exchange.
Crypto exchange refers to a webpage or site users use to exchange their crypto assets or convert fiat money into virtual money however the wallets are used for storing these assets.
Wallets assist the user with an entire control on their assets whereas on the exchange you don’t get the entire control there’s the centralized authority that has a share in the control of your asset.
The wallet of crypto includes private and a public key which gives trader and entire control and only one having access to these private and public keys can have control on asset whereas on exchanges there are chances of losing asset due to fear of exchange being hacked or something as the private key here are not limited to owner only but exchange too.
Main purpose of wallet and exchange are not the same wallet focuses on storing assets whereas exchange was aimed at trading assets.
The exchanges are either centralized or decentralized the wallets mainly depict decentralized nature.
Wallets doesn’t have the feature of seeing the chart for technical analysis of chart but exchanges mostly have a chart for technical analysis on their website.
Examples of wallets include Metamask, Tronlink, Trust wallet, etc. whereas examples of exchanges are Uniswap, Houbi, and Binance, etc.
Mention the advantages and disadvantages of DEX and CEX.
PROS OF CEX
Users in centralized exchanges have markets with high liquidity.
Centralized exchanges inhibit high trading volume in them.
One can convert their fiat money into virtual assets using centralized exchanges.
Users here have a variety of methods of payment i.e. through credit cards, bank transfers, etc.
There’s a third party or centralized authority where users can communicate in case of any bug or issues.
CONS OF CEX
Users here don’t have exclusive control on their private keys issued by centralized exchange hence there’s no complete control of the owner.
The centralized exchanges hold the attention of hackers and can cause loss of assets to traders from their attacks.
The account verification process requires personal documents which are not safe to share such as CNIC, address, etc.
One of the sad most parts of this type of exchange is the market manipulator's role who causes loss to users in trading.
PROS OF DEX
The first benefit of DEX is related to what its name implies i.e. decentralized. In simple words, this dex uses peer to peer system that connects the buyer and seller directly removing the job and need for a third party or centralized authority.
The account creation process is pretty simple unlike CEX which asks for personal details hence the DEX lets users operate it without staking users' privacy.
Being operated or built on blockchain technology they are resistant to hacking hence a secure place for traders to invest.
Unlike CEX they do not have manipulated markets hence assets are at their natural price.
Low transaction fee since the role of the third party is eliminated along with its charges.
CONS OF DEX
Once a transaction is made, it cannot be undone and in case of sending it to on wrong address, there’s no way back to restore it.
DEX doesn’t support fiat currency yet.
In case of attack from hackers users have no centralized authority to complain or claim their loss.
We have seen scalability issues in decentralized exchanges in case of a crowded market.
Have you used an Exchange before? Tell us about your experience
Yes, I have used multiple exchanges ever since I became a member of the crypto world such as coin base, bitcoin, Kraken, etc. However, I’ll be speaking on my experience generally. When I first get to know we are supposed to use crypto exchanges in crypto I installed some of these exchanges and got high key confused as I couldn’t understand how I’ll be using this thing. However, with guidance from different individuals and Youtube videos, I gradually learned to use these exchanges and now I find it pretty simple to trade using these exchanges.
There are so many more things I came across while learning to use a crypto exchange such as how we can use wallets to store assets or how we can place limit orders or market orders. I learned how we can use charts available in exchange for technical analysis and trading. However, there are still some flaws in crypto exchanges that I believe will be taken care of with time.
Conclusion
Firstly I’ll repeat the topics we covered in this homework task which includes learning what exchanges are and how they differ from wallets. Secondly, we looked at a few pros and cons of CEX and DEX, and lastly, I shared my experience with DEX. Loads of appreciation for a professor for his efforts in lecture and homework tasks. Hoping I meet your expectations for this task.
@dilchamo kindly check it my homework its already two days
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