The term “Cryptocurrency” is ruling the world in recent years. Cryptocurrencies are of primary concern since a secure, trustful one to deal since the world is moving towards that! Moreover, the currencies are digital they cannot be counterfeited and this is why investors are panting towards crypto exchange services!
With the surge in Cryptocurrencies, traders’ demand for Cryptocurrency Exchanges to perform trading. Crypto Exchanges play a vital role in the development of the blockchain industry.
To insert simple words, a Cryptocurrency Exchange allows the investors to trade, buy or sell cryptocurrencies instantly. Usually, a crypto exchange supports more than 20 currencies to perform well-established trading. When it comes to exchange, people look out for crypto holdings to reap high-end dividends for their business. Therefore, they prefer exchanges which offer great functionalities with feature-packed solutions.
According to DataLight, a crypto analytic website published a report which unveiled that the United States has recorded the highest number of visits on Cryptocurrency exchanges. According to the report, it has recorded 22 million monthly visits leading to 100 cryptocurrency exchanges.
Centralized vs Decentralized Cryptocurrency Exchanges:
With such a rise, these exchanges are the next hot talk of the town!
A centralized exchange operates similar to the banks today:
- There comes an owner.
- They are safe.
- They follow rules and regulations.
Although Centralized exchanges are in existence, the concept of Decentralized Exchanges is in circulation everywhere!
Added, the war against Centralized Exchange has already begun! Wondering how?
You would have probably heard of Proof of Keys concept which was given by the famous bitcoin advisor, Trace Mayer. He suggests that every bitcoin owner who has stored his BTC on a centralized exchange should transfer to its own wallet.
As you all know, coins which are stored by a third-party service and not yours. This could raise questions with security!
This is what exactly happened with HitBTC, which is a centralized exchange with a trading volume of around 40,000 BTC. When trying to withdraw their BTC, some traders have got a message, “Withdrawals are temporarily disabled for this account”.
Added, you need to know the risks associated with the centralized exchange:
- They can be hacked easily through which funds could be lost.
- The entire exchange can disappear tonight.
Now you would understand the real problems with Centralized Exchanges. However, to make Proof of Keys outmoded and you are the true owner of your assets, the decentralized crypto exchange came as a godsend strategy!
This is because:
- Enhanced Privacy due to no registration requirements or KYC process.
- No deposit or withdrawal is required. All the transactions happened between peer to peer is handled by programmatically secure smart contracts.
- No single point of failure, control or regulation.
Before a couple of years, Decentralized Cryptocurrency Exchange was in trouble and people were losing funds even with making small mistakes. However, in recent years, this has been the most intuitive platform.
If you are still not sure of what is decentralized exchange, this is the exchange which allows the users to control their crypto funds. Added, this exchange does not have a third-party set up!
To resolve all the issues associated with a centralized platform, peer to peer exchange came into existence. This means that users can trade with other users and the cryptocurrencies will be transferred from each other wallets other than from wallets in the cryptocurrency exchange.
Added, to ensure fraudulent activities don’t happen, decentralized asset exchange offer, where each party would deposit their funds and both parties would get their funds!
How does a Decentralized Exchange work?
A Decentralised exchange works as below:
- A token owner places the order: In order to exchange his/her assets with another asset available on DEX. The token owner specifies the number of units, they have to sell, the cost of the token, and until which time bids for their assets is allowed.
- Once the selling order is set, other users can submit bids by singling a buy order.
- Once the time is set by the sellers, all the bids are reviewed and executed by both the parties.
While seeing from outside, as a user placing an order:
- You are using your wallet address to sign in to blockchain decentralized exchange.
- You can submit a buy or sell request.
- The smart contracts get executed and transfer of assets is done.
- Disconnect it.
With this popularity, many startups are interested in knowing how to build a decentralized exchange. The thing is it could be the reason through which dividends can be raised.
Why build a Decentralized Exchange?
By taking all these criteria into account, you need to take into account the following strategies as well:
Trading fees are the area where most of the crypto traders pay attention to. In the case of traditional platforms, customers have to pay a per trade fee which is different from crypto trading platforms!
Centralised exchanges usually charge a % of the fee for every transaction, while in a white-label decentralized exchange it operates similar to the per trade fee!
Therefore when a transaction is ready to be placed on DEX, you need to pay a gas fee through which your trade will be confirmed through Blockchain. Gas cost would usually range between $0.05-$1.
Decentralized exchange script usually does not have a central authority involved. Therefore, no requirement will be imposed on them. One can sign in and start trading without any identity verification.
Additionally, Anonymity allows the user to access the tools which are not available otherwise.
If you are not clear, let me explain with the example. BitMEX is one of the crypto exchange, however, doesn’t allow the traders from the US to leverage the services!
On the flip side, dYdX, the largest decentralized exchange allows the user to avail services!
Yet another feature of decentralized exchange bitcoin is the ownership over his/her assets. In a centralized exchange, the ownership of the coins is held by the exchange completely. However, by holding on the exchange to the keys can lead to a faster execution since the user does not need to provide access. But this can be the reason for the crypto theft!
You have a real example of this. In 2018, $713 million was stolen with the most of them coming from Coincheck Exchange hack.
In a Decentralised Exchange, you are completely free from these risks!
The downfall of centralized exchanges is principally with Liquidity factor. Without Liquidity, price discovery is hard to achieve!
The COO at Zeus. Exchange, Catherine Yushina highlights the importance of Liquidity in crypto trading.
“Liquidity in crypto can be provided by crypto assets backed by traditional assets, aka by bridging crypto and fiat markets. Higher liquidity would cause faster transactions, more stable prices and therefore more market participants. This would boost the general public adoption of blockchain technology and crypto instruments and lead to “maturity” of the industry. While there are discussions around Crypto VS. Fiat worlds, crypto is more of an extension, the next evolution step for the financial market as a whole”.
Pick which fits in
As the world of crypto takes time to mature and develop into the featured ecosystem, cryptocurrencies have to take a center stage! In recent days, coins and tokens are the forms involved in investment speculation, which gives us access to the trading platforms that have a larger shape in the industry! There are a plethora of startups who are moving with either of the exchange depending on their roadway!
Choosing either the best decentralized exchange or centralized exchange is going to completely depend on you and your destination of success! If you are with a decentralized exchange, a higher level of responsibility is always needed to safeguard your own assets!
Decentralization brings us the new world of trustlessness, but you must trust yourself to be responsible!
About The Author: Danyal Ahmad
A Blockchain developer working with Hyperledger Fabric and Ethereum.
I am an Information Security graduate with major in cryptography and currently doing research on scaling the bitcoin blockchain using off-chain transaction payment system.
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