Before you can begin cryptocurrency trading, the first thing you must know is you would need a cryptocurrency exchange.
A cryptocurrency exchange is simply a place or a platform that allows you to buy or sell digital coins like Bitcoin (BTC), Litecoin (LTC), Ripple (XPR), Ethereum (ETH), and many more.
However, every cryptocurrency exchange has unique rules and regulations that guide transactions.
Most of these exchanges provide you access to the most substantial and recognized cryptocurrencies while some others allow you to exchange your fiat currency for a digital coin and vice versa.
Generally, when selecting an exchange platform you must consider its unique features as well as the level of security, available currencies that can be traded and exchanged, and transaction speed.
Furthermore, there are two major kinds of exchange, which are:
- Centralized cryptocurrency exchange
- Decentralized cryptocurrency exchange
Centralized cryptocurrency exchange
A centralized exchange is a platform where you can purchase or sell digital assets.
In this exchange, you will need to trust and depend on a third party to manage your transactions as well as secure your assets on your behalf as a buyer or seller.
The deals carried out on these platforms are not tracked on the blockchain technology and that is why such exchanges would need you to submit your personal data for verification.
Although, if it involves a company, then you would need to provide your corporate or official data to the exchange so your account and detail are verified.
In addition, the more data you make available to these exchanges, the higher your withdrawal limit will increase.
All verified users or traders on these platforms have the privilege of contacting the support team in the case of a technical problem and even if you lose your password.
Some centralized cryptocurrency exchanges offer users a team or set of two at fixed prices.
These exchanges are universally popular among the crypto ecosystem, and can conveniently be found online.
Examples of centralized cryptocurrency exchanges are Binance, LocalBitcoins, Coinbase, and many more.
Decentralized cryptocurrency Exchange
A decentralized cryptocurrency exchange is also known as ‘DEx’ is quite similar to a centralized exchange only that it does not allow a third party that you can trust or depend on.
However, all funds from successful transactions in this exchange remain securely stored on the blockchain.
These platforms encourage peer-to-peer (P2P) trading whereby it uses proxy tokens, assets, and an escrow system, unlike the centralized exchange which uses IOU-based systems.
In a DEx, you bring cryptocurrency to the gate where it is stored and it gives you proxy tokens in exchange for it. Therefore, you can now use the tokens within the blockchain of this exchange.
NB: The cryptocurrency given in the gates serves as a guaranty of these tokens.
Afterward, you can now place an order to sell your tokens in exchange for other tokens in exchange.
The good thing is that your order, parallel process, and all consequent processes are all stored on the blockchain of the exchange.
This storage process is very impressive and quite efficient.
However, as a user when you receive a token through a transaction, you are allowed to convert it to real cryptocurrency.
Major Differences between centralized and decentralized Exchanges
Decentralized exchanges pay more attention to protection than centralized exchanges. Hackers are one of the risks of trading with centralized crypto exchanges.
However, the hackers can get access to the third party that uses private keys to access the funds of users, and if this happens you could lose all deposits in the process.
Some hacking incidents have previously occurred, but centralized exchanges did put a lot of effort into ensuring more security for clients.
Although, with a decentralized exchange, the risk of hacking is nearly impossible as well as losing funds due to the activity.
Furthermore, decentralized platforms have top-notch security because there is no possibility of many users losing funds as a result of a single cause unless it is associated with the DEx gates.
One of the solutions to security problems provided by centralized exchanges is offering decentralized accounts to customers or users.
Centralized exchange or platforms mandate charges on users for services. However, this fee differs from one service provider to the other based on the features provided.
Meanwhile, the decentralized exchanges either have no charges or very little charges for complimenting orders on the blockchain.
It is quite easy to control centralized exchanges, unlike decentralized exchanges.
All centralized platforms need licenses to operate and must adhere to all the rules of local regulatory authority, unlike the decentralized exchanges.
The decentralized platforms don’t require regulation because it’s highly difficult to enforce because they operate on a distributed blockchain.
However, this simply means if a government bans cryptocurrency exchanges, decentralized platforms can still operate.
The features of centralized crypto exchanges have a greater edge over decentralized platforms.
In terms of features, you can carry out margin trading, use collection management tools, as well as use various advanced order types to trade effectively.
Decentralized crypto exchanges have limited types of orders and don’t allow margin trading or anything related to it. Hopefully, if there are more advanced decentralized platforms in the market, the exchange might provide advanced and efficient features.
Centralized exchanges have more liquidity because various users make specific orders dependent on market trends. Therefore, if an asset is in high demand, multiple users will trade it accordingly.
In addition, it has market dictators who include more liquidity to the platform, unlike decentralized platforms who don’t have as much liquidity as the centralized platforms simply because users order matching which takes time. This could be because of its low popularity.
Finally, decentralized cryptocurrency exchanges have more positive differences, unlike centralized exchanges that seem to struggle more than they ought to.
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