Why are Cryptocurrency Exchanges important? How to trade cryptocurrency?
The first thing you need to do before start trading cryptocurrency, is identify best crypto exchanges. It is very important to know which exchanges have the cryptocurrency you are looking for. So you can evaluate which one is suitable for you.
Cryptocurrencies are classified as an asset class that gives you a significant profit on investment. Despite the lack of government support, cryptocurrencies has become very popular in recent years.
What is a crypto exchange platform?
It is a platform that you can use to trade cryptocurrencies. In fact, these platforms act as an intermediary between the buyer and seller. Their income comes from the commissions of the users trades. Here are three types of cryptocurrency exchanges which will be described in the following.
Centralized Exchanges (CEX)
Centralized crypto exchanges are platforms that have made it possible for users to trade cryptocurrencies and also convert them to Fiat currencies and vice versa. They act as intermediaries in trades. And they are reliable guardians to store and protect your property.
As of September 28, 95% of cryptocurrency trades, or $ 228 billion, were through centralized exchanges. The advantages of centralized platforms include ease of use, diverse services, low trading fees and a strong and convenient trading platform.
As the name implies, CEX Cryptocurrency Exchanges exchanges are owned by one or more people, which is their main drawback. They are required to comply with the laws of the country in which they are based. It is worth mentioning that these trading platforms can be hacked and we must be very careful in choosing them.
The best criterion for choosing an exchange is its daily trading volume, but be careful, trade volume will not be our only criterion. Rules of the exchange itself and the country where it is located, the transparency of the information about the company, legality and approval of its activities by regulatory institutions are also important.
Top crypto exchanges in terms of daily trading volume include Binance, Huobi, Okex, CoinTiger and Bybit, respectively. Large cryptocurrency exchanges have a strong system and they can not be hacked so easily. However, crypto regulated exchanges that have the above-mentioned features are responsible for compensating users’ assets.
Centralized crypto exchanges are not suitable for hodling because the private keys of users’ wallets are saved on their own servers. . It is better to use a crypto wallet instead. (Read the wallet article for more information).
Decentralized exchanges (DEX)
These platforms are written on blockchain, unlike the previous category these are non-hackable. Users can trade cryptocurrencies without KYC (Know Your Customer) process. There is no intermediatery and all transactions are managed by self-executing smart contracts under a set of pre-coded rules.
Since all transactions are stored in the blockchain network, it can be said that DEXs are very transparent. Centralized exchanges usually list new currencies according to their business activities and security standards but Many altcoins that do not satisfy some of the requirements can be traded in the decentrilized cryptocurrency exchanges.
It should be noted that anyone can create trading pairs in decentralized exchanges. Decentralized crypto exchanges encourage liquidity providers in order to provide sufficient liquidity to the market. Introducing your personal tokens is one of these methods. These tokens can be used as a reward among participants. Dexs are not the custodians of your currencies.
In fact, you always have control over your private keys, while centralized exchanges hold your private keys on your behalf. The benefits of dexs include trading without authentication, reasonable commissions, error-free operation and prevention of market manipulation. And also users can monetize of the liquidity pool, and cryptocurrency staking.
Their disadvantages include high price fluctuations, arbitrage, low trading volume, impossibility of linking bank account and converting Fiat money into a cryptocurrency and lack of determination of take profit and stop loss, as well as the impossibility of placing an order.
Of course, many of these problems are solved in some new dexs and they gradually become more complete. For example, the DYDX platform was created for the purpose of futures, which has high leverage and has many fans.
Over the past year, DEXs have experienced tremendous growth. Their trading volume increased from $1.87B in June 2020 to $87B in the same month of 2021. This shows their growing popularity.
How exchanges work?
1- Connecting the wallet to DEX: Both buyers and sellers use their wallet address to enter the decentralized blockchain platform.
2- The token owner orders: In order to exchange the property with another asset, the token owner determines the number of currency units and its price. Until then, bids are allowed for their assets.
3: The buyer orders: After determining the sell order, other users can send their offers with a purchase order.
4- Matching the transaction: After determining the time by the sellers, all offers are reviewed by both parties. with the implementation of smart contracts, the transfer of assets is done.
5- Disconnecting wallet from DEX.
Some examples of the best decentralized exchanges include Uniswap, Sushiswap, Pancakeswap, 1inch, Binance dex, IDEX, Balancer, Bancor and Waves dex.
P2P exchanges
Peer-to-peer transaction is a type of trade that takes place in P2P exchanges. In this type of trading, the parties participating in the transaction interact directly with each other and the desired currency is exchanged between the two traders at the agreed price in the desired volumes. There is no need for a third party in peer-to-peer exchanges.
How p2p crypto exchange works
These platforms are available in two models: Automated and Escrow based.
Escrow based:
In this model, traders create an advertisement of purchase or sale of the desired cryptocurrency on the platform, and then, if the other party accepts, the agreed amount of currency is locked so that the buyer pays for it. After payment, locked currencies are released.
To better understand this issue, consider the following example:
Suppose kevin creats 3 BTC buy order and Henry, on the other hand, orders 3 BTC for sale. Kevin and Henry contract with each other through the platform. The Smart Screw contract holds 3 BTC of Henry until they agree on the terms of the deal. After Kevin deposits designated funds into the henry’s account, Screw releases 3 BTC and sends them to John’s wallet address as soon as the payment is approved by Henry.
Automated exchange
In this type of transaction, after the conditions are determined by the traders, the buyer and the seller are connected to each other by the software. This mode can be considered similar to centralized platforms. In this case, the transaction does not require a third party. The third person only intervenes when the two parties get into trouble with each other, otherwise the presence of only two traders is sufficient in all stages of the transaction.
As we have seen, the system implemented in peer-to-peer exchange is highly secure.
Why P2P exchanges can have a bright future?
1- Global market:
Dealing with people around the world in just a few seconds is one of the reasons why a significant number of people use it.
2- Various payment methods:
Various payment methods such as bank card, Visa card, Master card, PayPal, WebMoney and etc, can be used for purchases.
3- trading cryptocurrencies in countries where exchange is illegal:
In countries where trading cryptocurrency is illegal, P2P exchanges offer a very convenient solution. These are not located in a specific place so they can not be simply restricted.
4- Respect for privacy:
Sometimes trading cryptocurrency, requires authentication with personal information such as identity card or passport. But in this type of exchange, there is no obligation to record personal information. But registration is required in most of them.
5- Security:
As mentioned earlier, the peer-to-peer trading system is highly secure and users have complete control over currencies and even other securities.
P2P exchanges are good solution for trading cryptocurrency, but they also have their own disadvantages that will be described in the following.
1- Low trading speed:
P2P transactions take place almost immediately after both parties confirm the transaction, but one party can delay the transaction for various reasons. Traditional transactions do not require waiting for the buyer or seller to confirm the transaction. In these transactions, the buyer or seller may change their mind and cancel the transaction halfway.
2- Low liquidity:
The use of P2P cryptocurrency exchanges is only for those who are interested in certain benefits such as privacy, security and ease of payment. Professional traders use centralized platforms.
Result
As mentioned above, these types of exchanges are not flawless. With the development of the blockchain industry and cryptocurrencies, many tradings are centralized and subject to the regulations of the countries in which the participants live. This means that governments sometimes ask exchanges to provide users with information about their identities and transactions.
As a result, the goal of cryptocurrencies, which is anonymity and privacy, is lost. P2P exchanges and DEXs can be a good option for protection of privacy. However, each of the three categories described, has their own application and you have to check which one is the best for you.
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