Steemit Crypto Academy Contest / S1W2 – Reviewing Centralized Exchanges by @janeo42
Introduction
Since the advent of cryptocurrencies, so many exchanges that are based on cryptocurrencies have been created. These cryptocurrency exchanges have turned out to become very important elements in the blockchain world. They help users who have access to cryptocurrencies to be able to convert them to fiat currencies and other cryptocurrencies as well.
They have played a vital role in the cryptocurrency world because users have a means by which they can get their cryptocurrencies converted to fiat currencies. They can also convert it to other cryptocurrencies and they can trade among themselves. This is powerful as it makes cryptocurrencies become useful like the traditional fiat currencies we are used to.
The image above shows that there are a lot of exchanges that have been brought about since the advent of cryptocurrencies and by extension blockchain technology. At the time of writing this publication, there are 522 exchanges according to CoinMarketCap.
These exchanges are categorized into two types, namely, Centralized & Decentralized exchanges. Centralized exchanges are ones that are in the custody of the user's funds. That is when a user signs into the exchange, they deposit their funds there in which the exchange 'holds' it for them. One common characteristic of a centralized exchange is that they usually perform Know Your Customer (KYC).
On the other hand, a Decentralized exchange is one where users are in control of their funds. That is, with these decentralized exchanges, users have to connect their respective wallets to the exchange and perform their operations from there. They don't do KYC.
Brief Discussion of Centralized Exchange
Centralized cryptocurrency exchanges are exchanges that are in control of how activities and operations such as buying and selling of cryptocurrencies are done. They are third-party entities or middlemen which bring about buyers and sellers of cryptocurrencies on their platforms.
As previously stated, one of the things they do is that they are in control of users' funds whereby users are made to store their funds within the platform upon registration before they can perform any exchange activity. They are the ones who are in charge of the private keys of users, all that a user is left with is their username and password.
This characteristic of centralized exchanges goes against the principle of cryptocurrency and blockchain technology, in that it is decentralized in nature. However, because cryptocurrencies are currencies that are digital in nature, centralized exchanges have been able to use the digital components of cryptocurrencies to create their products.
Benefits of Centralized Exchanges
1. Access to a variety of other Cryptocurrencies: Centralized exchanges are more popular and widely used by cryptocurrency users hence a lot of cryptocurrency coins or tokens are listed on their platform for trading and investing. This allows users to have a wide variety of cryptocurrency pairs to trade with or invest in.
2. Have a lot of Liquidity: There's so much liquidity that is found in centralized exchanges. Market makers (centralized exchanges inclusive) always provide liquidity to different assets by buying or selling at their own determined price, while market takers buy and sell at these prices that have been set by the market makers.
3. More Buyers and Sellers: Centralized exchanges usually have more market participants who are ready to perform buying and selling activities based on the prevailing market conditions.
4. Providing quality trading tools: Users of centralized exchanges usually have a better trading experience because they are provided with sophisticated tools that can be used for trading such as trading charts, trading indicators, etc.
What to look for when choosing an Exchange
When trying to choose an exchange for trading activities, there are certain things to watch out for in order to prevent any grave circumstances in the future. These are some of the things to look out for.
Existence of the Platform: One thing users should look out for is the time of existence of the exchange. It is important to look at this aspect because it would go to show how much the exchange has shown its capacity and matured in providing services. It is best to choose an older cryptocurrency exchange over a newer one.
Size of the Exchange: The size of the exchange is usually important as it shows that there are a lot of other users on the exchange platform and there's also a lot of liquidity. This means that it is easier to perform trading transactions as there would be other traders in hand to buy or sell their assets with you.
Ratings of the exchange: Normally an exchange with a higher rating gives a good precedent for the exchange. It lets prospective users have more trust in the exchange and thus be ready to put their assets on the platform.
History of the Exchange: Having a good understanding of the history of the exchange helps users to make better decisions regarding the exchange they intend to create an account. In the past, some exchanges have been hacked and millions have been parted from those exchanges. This puts doubt in the minds of existing and new users as they believe that such an event can occur again and this gives a bad reputation to the exchange.
Review of Gemini Exchange
In 2016, it became the first exchange that had an Ethereum license. Then it went on to become licensed by Zcash to allow it to offer trading involving Zcash paired with other cryptocurrencies.
Since then they have had a lot of other partnerships with other top cryptocurrency projects and big organizations. One of importance is their collaboration with Caspian, which is a trading and risk-management service for digital currencies.
Some other notable partnerships are Samsung, TradingView, Brave, Nifty Gateway, etc.
They have the right resources for any type of trade. They have an array of trading tools for beginners who are just starting and professional traders with high-level experience.
They also have their own NFT marketplace called Nifty Gateway. Through Gemini, users can buy, sell, and store non-fungible tokens (NFTs).
Explain Its Uniqueness
One thing about Gemini exchange is that you can earn high interest with your assets. A user can earn up to 8.05% APY of their asset on the platform.
They are a platform that is security conscious. They have a SOC 1 Type 2 and SOC 2 Type 2 compliance certification. They are also a licensed New York trust company and undergo exams regularly, with audits in cybersecurity that are conducted by the New York Department of Financial Services. There is another security feature that is found on the exchange.
They have an important partnership with Brave Attention Token (BAT) the tokens that are gotten from the brave browser. Users who have brave browsers earn BAT with the browser. Gemini can be integrated into the browser such that the rewards earned by users are immediately stored in their brave account and can be converted to fiat currency or traded with another cryptocurrency.
What I would like to change about Gemini
As impressive as the Gemini exchange has been so far, there is one thing that I think the owners of Gemini can work on.
The platform doesn't look like the traditional trading exchanges with the usual charting interface and trading tools that come along with it. Users have to do much more for them to get any hope of performing any trading operation.
Another thing is that, unlike some exchanges where the cryptocurrency pairs are given out expressly, you have to choose a cryptocurrency here before you can see the other cryptocurrency that it is being paired with. This feature makes it a little bit difficult for users to start trading. If they can change their trading interface to how it is on other exchanges, then I think Gemini would become one of the best trading exchanges in the future.
Shortcomings of Centralized Exchanges
First of all the shortcoming of centralized exchanges is that they are centralized in nature, that is, they control the behavior of users who make use of their exchange platform. This is a big deal because cryptocurrency by nature is decentralized whereby the owners of the cryptocurrencies can make use of the cryptocurrency anyhow they wish.
It is prone to hacks as most of the user's funds are stored within its platform. This makes hackers excited and step up their game because they know that there's a lot of money sitting within these centralized exchanges. In 2011, the first-ever breach into a cryptocurrency exchange was Mt. Gox. In 2019, Upbit was another cryptocurrency to be hit, then Binance (the largest cryptocurrency so far) was also hit. Most recently, KuCoin was also hit in 2020. Looking at all these hits, there is one thing in common, they are all centralized exchanges.
Another thing to consider is the transaction fees that are incurred by users, they are large. This can affect a user negatively as he may not have the required amount to perform transactions at certain times.
Because it has to take note of users on its platform, they perform verification. This verification process can be very long and time-consuming. It is not healthy for cryptocurrency-based assets.
How users' funds can be protected since they don’t have access to our wallet's private keys?
In my own understanding, users can protect their funds in two ways. The first way is exchange-based, that is they make use of 2-factor verification. The use of 2-factor verification strengthens the security of the users' access to the exchange and therefore his funds. It makes it difficult for anyone to easily gain access to an account.
The second way is the decentralized way. What I mean is that users can also store their funds in a private wallet, then anytime they want to perform a transaction, they can transfer funds to their exchange account and operate from there.
Conclusion
Cryptocurrencies through blockchain technology have changed the way we interact with finance fundamentally. Because of that, exchanges that are cryptocurrency-based have popped out and grown. They have helped to make transactions related to cryptocurrencies easier.
However, most of the exchanges that are dominating are centralized in nature and this is contrary to the nature of cryptocurrency.
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