Dex, Cex, Popular Exchanges and Trading Cryptos - Steemit Crypto Academy Season 4 - Homework Post for Task 7
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~INTRODUCTION~
Good day Steemians!
This is my entry for Task 7 of the Steemit Crypto Academy Season 4 Beginner's Course on Dex, Cex, Popular Exchanges and Trading Cryptos. I will be answering the question 3 of the homework task.
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 an Exchange?
An exchange is essentially a marketplace. The market is a place where individuals swap items of value with other individuals, for other items of value. It is a place where buyers meet sellers and vice versa.
In the cryptocurrency world, an exchange is a place/platform where people can trade cryptocurrencies for other cryptocurrencies or fiat currency. In order for an exchange to function the needs to be the presence of buyers of goods and sellers of those same goods. These individuals then swap these items for one another at a decided upon rate.
There are currently two types of exchanges:
- Physical/Offline Exchanges: As the name implies, this is a specified physical location where sellers and buyers meet face-to-face to swap their cryptocurrencies. The activities of buyers and sellers are usually mediated and facilitated by a broker. The broker manages interactions and transactions between the buyers and the sellers to enable faster, more fluid and less fraudulent trading.
- Virtual/Online Exchanges: these are online/digital marketplaces. The world we live in today is a global village interconnected by the internet which has made goods and services much easier to access for individuals. Online exchanges leverage on the internet to provide a platform for buyers and sellers to meet virtually and exchange their goods. Online exchanges are of two classes:
- Centralized Exchanges (CEX): These are exchange platforms which are built with an intermediary/middleman between the buyers and sellers. This intermediary acts as a central authority over the both parties and as such the both parties are not in total control of their assets and transactions. Some examples include:
- Binance
- Huobi
- KuCoin
- Coinbase
- Decentralized Exchanges (DEX): In these exchanges there is no central authority or intermediary between buyers and sellers, hence, buyers and sellers interact and transact directly with one another ie a peer-to-peer transaction system. These are more in line with the general cryptocurrency vision as they give users full authority and control over their assets. Some examples include:
- UniSwap
- Waves DEX
- JustSwap
- SushiSwap
Differences between a Wallet and an Exchange.
We have already spoken about what exchanges are, so, in order to understand the difference between exchanges and wallets we must also understand what a wallet is.
A cryptocurrency wallet is a storage platform for individuals to keep their cryptocurrency assets securely. Wallets are mostly used by individuals to store their cryptocurrencies for a long period of time. Wallets are of two major types
- Hot wallet: These are wallets connected to the internet.
- Cold wallet: These are wallets without an internet connection.
Here are some of the differences between a wallet and an exchange:
| Wallet | Exchange |
|---|---|
| The major function of a wallet is the secure storage of crypto assets | The major function of a crypto exchange is the trading of crypto assets |
| Can be offline | Must be online to function |
| Is completely decentralized and does not require a third party or intermediary | May or may not be decentralized. |
| Generally more secure due to its decentralized nature | Usually less secure, especially Centralized Exchanges. |
| Always gives users full control of their assets | May not give users full control of their assets (Centralized exchanges) |
| Can stand alone, does not require exchanges to function | Requires a wallet to function. May make use of an inbuilt hot wallet (CEX), or connect to a standalone wallet (DEX) |
Here are some examples of cryptocurrency wallets:
- TrustWallet
- MetaMask
- Safepal Wallet
- Ledger Nano Wallet
Mention the advantages and disadvantages of DEX and CEX.
As I mentioned earlier, there are two types of exchanges; Decentralized Exchanges and Centralized Exchanges. We will now look at the advantages and disadvantages of these two:
CEX
Advantages of CEX
- There is a governing authority to mitigate risk and ensure seamless transactions between users.
- CEXs usually have better user interface when compared to DEXs, and are easier to understand and use.
- CEXs usually have higher transaction volume and liquidity than DEXs, hence faster transaction speed.
- With some CEXs, users can also exchange their fiat currency for cryptocurrencies.
- CEXs usually require users to sign up with their real identity information. This reduces risk of fake accounts and scammers, or untraceable accounts.
- One can contact the central authority for any mistakes made, like losing one's keys, or transferring assets to the wrong account.
- CEXs incorporate regular forex trading features like the take profit, stop loss, trailing stop loss, market and limit orders and so on
Disadvantages of CEX
- The central authority really defeats the whole purpose of cryptocurrency i.e. decentralization
- The central authority makes hacking easier, as one just needs to gain control of the central servers.
- Users are not in total control of their assets, and can have their assets seized or withheld due to the exchange regulations.
- Transaction fees are usually much higher in CEXs than in DEXs
- Users generally have to give away their real world identity, hence privacy is reduced.
DEX
Advantages of DEX
- They are decentralized, hence users are in complete control of their assets.
- Transaction fees are usually lower than DEXs because there is no third party/intermediary
- Due to the decentralization, hackers cannot gain access to a central serve, this makes it more secure.
Disadvantages of DEX
- The user interface of DEXs is usually more complex, and not generally appealing to users.
- One has to take complete responsibility for their assets, as there is no central authority to do that.
- One cannot make use of fiat currency to purchase cryptocurrency, as most DEXs are crypto-crypto exchanges.
- There is usually low trading volume and liquidity on DEXs.
- Any errors made on a DEX cannot be reversed.
Exchange Experience
The first exchange I used when starting out with crypto was Binance, and till date, it is my most-used exchange because it is one of the best exchanges out there currently. My friend @alphafx was actually the one who introduced me to the Binance exchange and I began using it to trade cryptocurrencies, though as a beginner.
The Binance exchange has a lot of cool features, like staking and grid trading but mostly I just do spot and futures trading with it, and use it to receive and send cryptocurrencies.
~CONCLUSION~
Exchanges are a very important part of cryptocurrency trading, and in fact the whole cryptocurrency ecosystem. I have elaborated some of the reasons why, and some of the differences between types of exchanges. Hope you enjoyed reading!
-IamEl the ModestPoet
N/B: All pictures not cited, were designed by me using Canva, powerpoint, or gotten from the respective websites.