3-) 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 Exchange
In the crypto ecosystem, there are alot of crypto assets in the market which has thier various uses and purposes. Traders use these exchange platforms as a medium to trade thier assets. Either to swap one asset for another or to buy and hold the asset.
There are two different types of exchange,
- Centralised Exchange (CEX)
- Decentralised Exchange (DEX
Centralised Exchange
Initially, the only type of of Exchange that existed was the centralised exchange platforms where people buy and sell thier crypto assets. The Centralised exchange is the type of Exchange that is controlled by a central authority. Which means it requires an Intermediary to complete any transaction. The centralized Exchange is now widely accepted although it is controlled by an authority. The Centralised exchange has a wallet which allows users to hold thier assets.
The most popular CEX platforms are;
- Huobi pro
- Binance
Decentralised Exchange
As the name suggest, this type of Exchange is decentralized. That's it is not controlled by any central authority. It doesn't require any third party to complete any transaction. With this type of Exchange platforms, they are usually linked with the decentralized wallets before they function since they do not have wallets on thier own. The decentralised exchange uses liquidity in the liquidity pool provided by the liquidity providers to complete thier transaction.
Some examples of the decentralised exchange are:
- Pancakeswap
- Uniswap
Differences Between wallets and exchange
| EXCHANGE | WALLET |
|---|---|
| Most Exchange are usually Centralised platforms except the decentralised exchange. | All wallets are decentralised. |
| They are used for both trading (exchange crypto currencies) and holding crypto assets as well. | They are basically used for holding crypto asset. But can be used for exchanges when linked with DEX. |
| The Exchange has relatively low security compared to the wallet. | Has a better security than the exchange since it is decentralized |
| All the exchange platform can be used for holding crypto assets except the DEX | Not all wallets can be linked with DEX for trading. |
Merits of Centralised Exchange
User Friendly interface: The centralised exchange platforms has a user friendly interface which makes interpretations of the various options easier. Beginners are able to understand the interface which prevents unnecessary wrong transaction.
Highly Scalable: Numerous transactions could be completed quickly on the centralised exchange. Transactions on the centralised exchange are very fast which makes it more reliable during transactions.
Demerits of Centralised Exchange
Low security: Most centralised exchange has relatively low security since it is controlled by only one server from the central authorities. Unlike the DEX system where all the assets are kept in the wallets.
High transactions fees: The centralised system charges more fees. During transactions on the Bitcoin blockchain network or the Ethereum blockchain network in the Centralised Exchange platforms, the charges of the transaction are relatively higher compared to the decentralised systems.
Merits of decentralized Exchange
High Security: The decentralised exchange has relatively high security than the centralised exchange. The assets are kept in the wallets which is controlled by multiple servers which makes it difficult for hackers or fraudsters to hack.
Low Transaction fees: The decentralised exchange charges relatively low fees than the Centralised exchange.
Demerits of decentralized Exchange
Cannot operate on its own: it requires the decentralised wallets to hold the assets. Hence it functions completely with the help of the decentralised wallets. Like the Trust wallet and the metamask.
Low Scalability: The decentralised system has relatively low scalability. The number of transactions completed at a time are fewer compared to the centralised exchange. Moreover, transactions are not completed faster like the centralized system.
Have you used an Exchange before? tell us about your experience.
Talking of exchange platforms, I have used about 4 of the popular exchanges. Both the Centralised and decentralised exchange. The first thing I have noticed with respect to exchange is that, they have good security to keep you assets intact. So far so good, I have not faced any theft cases with any of the exchange wallets.
Not all exchange has all the crypto pair. Lets compare Binance to Huobi. We realise that on Huobi, there's Steem/USDT pair which allows you to trade steem for USDT or either way. However, there's no steem/USDT pair on Binance. So we can conclude that, steem can be better traded on Huobi than Binance in case scalping.
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