Unless you’ve been living on a remote island somewhere, you’ve probably heard of cryptocurrency. But you may not understand all the buzzwords associated with it. There is a growing interest in the cryptocurrency market and the associated technology known as blockchain. It really is no wonder that many people want to learn more.
Throughout history, people came together to marketplaces and exchanges to trade goods with each other. Thanks to technology, many of today’s marketplaces and exchanges take place digitally. Digital marketplaces exist for stocks, fiat currency, and cryptocurrency. Crypto exchanges are unique because they can be “decentralized”. This means that there is no central agency regulating the transactions.
Learning about cryptocurrency exchanges and how they work is an excellent way for beginners to grasp the unique and complex world of cryptocurrency. For more background, check out Cryptocurrency 101: An Overview first.
Crypto Exchanges in 2019
A cryptocurrency exchange is a platform for people to buy, sell, and trade different types of cryptocurrency. By allowing people to buy and sell cryptocurrency using fiat currency, people can invest and make decisions based on the exchange rate between different coins. Fiat currency is traditional money like the Euro, Yen, or US Dollar. You can also use exchanges to trade one type of cryptocurrency for another.
For those who are looking to invest in cryptocurrency, there are many different exchanges to choose from. Some of the most popular cryptocurrency exchanges are Coinbase, Binance, BitMEX, Kraken, and Gemini. Although, there are many more available, and the coins and services offered vary.
Choosing a cryptocurrency exchange depends so much on the needs of the participant. Some factors to consider are where they are located in the world, whether they are using fiat currency, and more. Some US cryptocurrency exchanges ensure customers’ fiat balances through the FDIC. This makes them less of a risk than others that may not be affiliated with any regulatory agency or insurance program.
Defining Decentralized Exchanges
In traditionally centralized exchanges, a third party is responsible for managing the funds between parties engaged in a trade. These centralized exchanges connect individuals in the real economy with cryptocurrency; they often store coins and manage electronic wallets. Centralized exchanges have control of when and how funds can be withdrawn, and what kind of fees are involved. They often comply with “know your customer” regulations, which require users to undergo an identity verification process.
By contrast, a decentralized exchange allows for party-to-party transactions without interference from an outside entity. The cryptocurrency is delivered from the buyer to the seller directly using an automated process. A program called a “smart contract” controls this process. The transfer takes place unencumbered by any rules or restrictions from any third party. Users place their trust in the technology of cryptocurrency rather than in a third-party organization.
It is this decentralized exchange platform that is so appealing to many people who are cryptocurrency enthusiasts. While many people feel that centralized exchanges are good for beginners, the decentralized cryptocurrency exchanges are ideal for those that want zero interference in buying and selling. There are several benefits of a decentralized exchange when it comes to cryptocurrency. Admittedly, there are also drawbacks that beginners should know about.
Centralized Exchanges vs. Decentralized Exchanges
Centralized Exchanges
The best way to understand the benefits of a decentralized exchange is to compare it to a typical centralized exchange. With a centralized cryptocurrency exchange, there is a central authority that manages the day-to-day operations. It hires employees to run it and develops both short- and long-term plans for things like growth, security and customer service. If they are hacked or scammed, or their customers are, there is recourse to recoup lost funds. Some centralized exchanges have insurance to support them.
On the other hand, a centralized exchange is also subject to internal regulations and external laws that dictate any number of facets of the business. Everything from who can be a customer to what information must be provided to participate in the exchange is controlled. Centralized exchanges can require fees for transactions and withdrawals. They are also vulnerable to hacking, server downtime, and a number of different government interferences.
Decentralized Exchanges
A decentralized exchange platform exists outside of any entity. The rules for transactions are part of the code within the blockchain technology itself. The information is completely secure because it is hosted on public ledgers living on servers worldwide.
Funds are secure in the participant’s digital wallet; instead of held in a bank or in a wallet controlled by a third party. Transactions do not require any personal information. They are simply a person to person deal. Decentralized exchange fees are quite minimal, and the time required to transact and withdraw coins can be faster and less limited than with centralized exchanges.
Of course, a downside of decentralization is someone can scam you easier. The lack of oversight means there is no real recourse to recoup losses. There won’t be any customer support or a central agency looking out for the user nor is anyone seeking to improve the experience. Lack of regulation means few restrictions.
Adapting to Decentralized Crypto Exchanges
Wrapping their head around a decentralized crypto exchange can be challenging; for those used to operating within centralized exchanges. For anyone who wants to dabble in the world of cryptocurrency, it makes sense to start with a reputable centralized cryptocurrency exchange and become familiar with the process. Then, they can move on to a decentralized exchange with more of the freedom and anonymity that many users crave.
