Steemit Crypto Academy Season 4 - Homework Post for Task 7
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.
It's with joy and pleasure that I write to express the knowledge imparted in me by this awesome lesson and I definitely know that no stone was left unturned in the explanation of exchanges in this lesson
What is an exchange?
Exchanges could be back-dated to even ancient times when even tokens and goods were received for another, (this was termed 'barter') and even other wise.
Fundamentally,ie in this context, exchanges could be seen as platforms that paves way for trading of crypto currencies, financial instruments etc over other traditional currencies or even fiat currencies or even buying of them too. This entails that the exchanges, proffer brokerage services to the customers by allowing them trade and buy on the platforms while charging just a little commission or transaction fees.
Examples of exchanges include : Binance, Luno, Coinbase etc.
Lets explain Binance operation for example, in Nigeria where crypto trading activities are banned, The platform helps traders to convert naira to USDT while charging a transaction fee before they can now trade fully on the exchange
The difference between an wallet and an exchange :
Before I entail the differences between the two, I'll explain a wallet like I explained an exchange in the previous sub topic.
A wallet simply-put, could be seen as an application system that keeps users trading and payment data secure for various payment patterns and online sites.
This explains the function of the wallet help the users in easy and fast buying, selling and trading of currencies even with a high level of security over them
From here we can now draw, the differences between a wallet and exchange :
Firstly, a wallet software primarily,offers services of helping the users to store their already gotten currencies with utmost security while on the other hand, exchange is the platform where the currencies are traded. sold or even bought.
Secondly, exchanges do not allow total dominance and control over your private key while the wallets allow control over their private key
Exchanges offer brokerage services by helping their users, buy, sell and even trade unlike wallets that do not.
Mention the advantages and disadvantages of DEX and CEX
Before I proceed to outline the advantages and disadvantages of the both, I'll wish to explain the two topics briefly.
Firstly, Decentralized exchanges (DEX) could be seen as kinds of digital exchanges that makes way for direct peer to peer currency transactions to happen without the involvement of middlemen in the transaction process
The Advantages of Decentralized exchanges(DEX) include :
Reduction of Malicious /Scam risks :
The advent of decentralized exchanges and mostly its quality of eliminating middlemen helps to reduce risks of fraud since the funds and currencies involved in transactions are transferred to no one in particular
The benefits of decentralized exchanges are seen too in their ability to leave their users data eg KYC forms etc private and not to be interfered with
Market exploitation avoidance : The watch word in decentralized exchanges "peer to peer" sums it all as the exchanges deal directly with their customers and leave them out of the risk of further exploiters
Disadvantages of Decentralized exchanges (DEX)
Liquidity Deficit :The funding and facilitation of digital transactions are majorly by centralized exchanges and the market volume remains dependent on them so trading activities could be delayed /reduced at the failure of central authority
Fiat currencies complexity to exchange :
Decentralized exchanges tend to restrict the trading of digital currencies over Fiat currencies and scare potential crypto users who don't own digital currencies already
Cumbersome processes involved :The signing up of the exchanges involves absolute knowledge of details (ie passwords, private keys etc) and so any mishap in these steps could lead to eternal loss of the assets
Centralized exchanges could be seen as platforms that aid in the buying and selling of digital assets, acting as reliable middlemen and trusted holders for protection/aid in buying of digital currencies. This exchange is different from the former, as it tolerates the presence of intermediaries unlike decentralized ones that do not, but eliminate them totally.
Advantages of Centralized exchanges
Trustworthiness :The existence of a middleman /central authority, paves way for its development to be sure and reliable so as not to fail /breach.
The simpler nature of the centralized exchange, leaves it simpler, better and faster for users to understand (user friendly) and even access to their data and accounts are made easier
Adequate liquidity :The source of liquidity majorly even to decentralized exchanges are centralized exchanges. In this way, user of centralized exchange find it very much easier to convert Fiat currencies over to digital and vice versa
Disadvantages of Centralized exchanges :
Vulnerability to attacks :The nature of concentration of transaction activities on an authority gives a target to any attack launched on a platform and if this happens, huge assets and currencies are lost eg, we can see Mt, Gox one of the global biggest exchanges (centralized) before they were hacked into and robbed off almost 900,000 BTC
High cost of transactions : Intermediaries presence in transactions relatively increase transaction fees and even more charging when the transaction volume is bigger
Limited custody :The centralized exchange aspect of trading involves the hand over of even private keys which the Exchanges hold and on the other hand, reduces users control over their funds
I am really happy to partake in this task and I will be moving on to the next introductory homework immediately, I have expressed my understanding of an exchange and a wallet , the decentralized exchange and the centralized exchanges also stating their advantages and disadvantages