What distinguishes cryptocurrency trading from trading other assets such as fiat currency, stocks, or bonds? There are many differences, but the most significant is that cryptocurrencies have their own trading exchanges, which can be centralised or decentralised.
Cryptocurrencies have risen in popularity and acceptance in recent years. This is due to the fact that they provide extremely low-cost, borderless methods of sending and receiving capital, as well as new investment opportunities. Furthermore, many people are turning to cryptocurrencies as safe havens for their money in order to shield their assets from individual and collective government inflation.
Centralized Exchange
Cryptocurrency exchanges allow users to buy or sell fiat currency for cryptocurrency, and vice versa, as well as swap one cryptocurrency for another. Currently, centralised exchanges account for more than 90% of all crypto trading activity. They have the largest market capitalization and have more liquidity than decentralised exchanges, which makes them more successful.
Users would normally establish an account with a specific exchange, which serves as an escrow service to oversee all sides of a transaction. They also ask you to switch your cryptocurrency from a personal cryptocurrency wallet to the wallet associated with your account.
Similarly, if you buy crypto with fiat, the exchange will keep your new crypto in the wallet associated with your account. If you're looking to start trading, it's normally simpler and more convenient to move your funds to a personal cryptocurrency wallet, which is much safer and stable and can only be accessed by you.
The advantages of such exchanges include their speed, availability of a wide range of cryptocurrency and fiat pairs, and low transaction fees. They also have a variety of trading platforms, user-friendly interfaces, and a variety of ways to buy crypto with fiat, making them versatile and easy.
Risk of Centralized Exchange
Centralized exchanges are third-party service providers that enable traders to buy and sell fiat and cryptocurrency using a variety of trading pairs. This, however, contradicts the very nature of cryptography, which is decentralisation, the elimination of third-party providers, and the resulting financial change and power.
Their centralised structure poses some challenges, one of which is hacking vulnerability. In the last decade, dozens of centralised exchanges have been hacked, with the perpetrators escaping with cryptocurrencies worth hundreds of millions of dollars.
To demonstrate the risks of centralised exchanges, some crypto experts have proposed the slogans "Not Your Keys, Not Your Crypto" or "Not Your Keys, Not Your Bitcoin." Apart from hacking, an exchange's immediate shutdown would result in the loss of all crypto kept on the exchange. Several exchanges have done this in the past, resulting in millions of dollars in losses for investors.
Decentralized Exchange
The true spirit of decentralised finance is carried by decentralised exchanges (DeFi). They are decentralised trading platforms that use smart contracts to automate the entire buy and sale process.
Users can transact directly from their wallets on a distributed ledger network, bypassing the single point of failure that centralised exchanges have.
Decentralized exchanges have existed for as long as centralised exchanges, but for different reasons, they have become less common and developed more slowly. Over the years, various DEX ideas have used various techniques, but they all have two things in common.
For starters, they do not need users to hand over their funds to a third party and exchange crypto-to-crypto. That means that, for the time being, centralised exchanges will be required to trade crypto for fiat.
Another distinguishing feature of DEXs is the ability to conduct real-time (on-chain) Atomic Swaps, allowing users to pass cryptocurrencies across blockchain ecosystems. This is because, despite being decentralised, blockchain networks are still standalone applications that, for the time being, cannot be interoperable with others.
Several DEXs have been created on the Ethereum blockchain ecosystem, which is currently the most popular smart contract developer platform. EtherDelta is one of Ethereum's oldest DEXs, allowing users to exchange Ether (ETH) and Ethereum-based (ERC-20) tokens.
Conclusion
The function of centralised exchanges in crypto adoption is actually very important. Even, as more people use them and deposit funds in them, they pose a danger to the decentralised nature of cryptocurrencies as a whole.
DEXs, on the other hand, have the benefit of wallet-to-wallet trading, but they are not as common or as simple to use as centralised exchanges. Users would be able to retain control of their funds while also having the ease and convenience of purchases thanks to technological advances and the presence of hybrid exchanges.
