Cryptocurrency exchanges are the lifeblood of the crypto world. They allow you to buy and sell cryptocurrencies, as well as exchange them for other digital assets. But how do they work? In this blog post, we will take a look at how cryptocurrency exchanges operate and discuss the different types of exchanges and some of the features that set them apart.
Unpacking Crypto Exchanges
Cryptocurrency exchanges can be decentralized, meaning they are not subject to government regulation. But most Crypto exchanges are centralized, which has led to some concerns about their safety and security. Many exchanges have been hacked in the past, and some have even failed, leading to loss of customer funds. As a result, it is important to carefully research any exchange before using it.
Unpacking Crypto Exchanges
When it comes to cryptocurrency exchanges, there are two main types: Centralized Exchanges and Decentralized Exchanges. Centralized exchanges (CEX) are run by a single entity, typically a company, and they act as the middleman between buyers and sellers. Some of the most popular CEXs are Binance, Coinbase, Kraken, and KuCoin.
Decentralized exchanges (DEX), on the other hand, are not run by any one party. Instead, they use distributed ledger technology, which allows users to trade directly with each other. The most popular ‘DEXs’ are Uniswap, Curve, dYdX, DODO, and Balancer.
How Crypto Exchanges work
Different Cryptocurrency Exchanges operate differently. Centralized exchanges are the most popular type of cryptocurrency exchange. They account for 99% of crypto transactions. They work by matching buyers and sellers of cryptocurrencies, usually using an order book.
An order book is basically a ledger that records all buy and sell orders placed on the exchange. There are two fundamental types of orders: market and limit orders. When you place a market order, the exchange will trade your funds for the best available marketplace in the order book. On the opposite hand, when you place a limit order, the exchange will trade your funds at a price that you specify. If your price target never gets hit, your limit order will not be executed. If the price is offered by a buyer or seller, the trade is then executed and the relevant cryptocurrencies are exchanged.
It’s important to note that when it comes to cryptocurrency prices, exchange volume matters a lot. Exchanges with more active traders offer more reliable pricing data since they better reflect the market’s overall sentiment; as a result, there may be slight variations in price across exchanges.
On the other hand, Decentralized crypto exchanges are peer-to-peer platforms that allow users to buy and sell cryptocurrencies without the need for a central authority. Instead of matching orders through a central order book, these exchanges match orders directly between users. DEXs use smart contracts, which are self-executing pieces of code on a blockchain.
How to trade on a Crypto Exchange
Getting started with trading crypto is easy; all you have to do is fund your exchange account – sometimes called a wallet. Even though any platform or app will provide the convenience of storing them, it’s always safer and recommended that you set up your own keys for extra security measures. Historically, there have been many exchanges that went insolvent and users lost their funds as a result. The most famous catastrophic incident was Mt. Gox (where hackers stole 850,000 Bitcoins.) This event gave rise to the popular crypto statement, “Not your keys, not your coins.”
Pros & Cons of Crypto Exchanges
Typically, CEXs offer a wider range of choices when it comes to trading. You get choices like options, staking, futures, lending, participation rewards, airdrops, and more. CEXs also have more liquidity than their DEXs counterparts. DEXs often have thinner liquidity. However, due to the nature of DEXs, there are often more crypto assets on DEXs since there’s no verification required to be listed on a decentralized exchange.
CEXs require users to go through a KYC process. This limits who can access and trade on the platform. The verification process kills the anonymity and decentralized aspect of crypto. On the other hand, a truly decentralized exchange requires no verification.
Future of Crypto Exchanges
The fall of FTX is a major event that’s shaping up the ‘next phase of crypto.’ The collapse of the second-largest CEX proved to today’s crypto generation that no exchange is ‘too big to fail.’ Additionally, people were taught the “Not your keys, not your coins” in a bitter way. However, this paves the way for truly Decentralized Exchanges to step up and attract more people. People who are frustrated with centralized policies and rules that keep them held hostage. The future of decentralized exchanges looks bright and reasonably compelling.
About Peerplays
We are dedicated to empowering people’s freedom to create greater outcomes, giving them control over how they own and collaborate worldwide. The core foundation for Peerplays success in 2023 relies primarily on the release and promotion of mechanisms incorporating decentralized ID, gamification, and ‘handshake’ like onboarding that is easily accessible to people who use smartphones. At Peerplays, we are on a mission to revolutionize the world of blockchain technology and empower individuals with the freedom to take control of their digital lives. To achieve this ambitious goal, we are constantly on the lookout for the most talented individuals who share our passion for innovation and our commitment to decentralization. If you believe in the transformative potential of blockchain technology and are eager to contribute your skills and expertise to this groundbreaking project, we want to hear from you.
