Steemit Crypto Academy Season 4 Beginners' Course - Task 7 : Dex, Cex, Popular Exchanges and Trading Cryptos
QUESTIONS
Explain in your own words what an Exchange is.
Differences between a Wallet and an Exchange.
Mention the advantages and disadvantages of DEX and CEX.
Have you used an Exchange before? tell us about your experience.
EXPLAIN IN YOUR OWN WORDS WHAT AN EXCHANGE IS
An exchange is a platform that enables easier buying and selling of cryptocurrencies. It allows for easy swapping of coins for example; swapping BTC to steem and steem back to BTC. In exchanges, cryptocurrency is purchased through different methods mostly depending on the type of exchange; bank transfers, Debit/credit cards, gift cards etc. Exchanges deposits funds by converting fiat currency from banks to a token of choice. This fiat currency could also be swapped for stable coins like USDT which can be kept till there's need for a transaction.
An exchange also acts as an intermediary for transactions between traders. For example the P2P trading section on binance that connects traders; buyers and sellers. Exchanges make money by collecting transaction fee from transactions made by users, though this transaction fee fluctuates depending on the channel of transaction be it; ERC10/20, TRC 20/10 and BSC.
There are two types of exchanges, and they are; Centralized and decentralized exchanges.
Centralized exchange:
A centralized exchange also known as CEX Is a platform that acts as a third party to transactions between users. Due to its centralized nature, CEX aids in the smooth transaction between buyer and seller, offering better protection of funds and safer transactions. Centralized exchanges are trusted and allows for purchase of cryptocurrencies through fiat currencies such as naira, us dollars.
Examples of Centralized exchanges;
- Coinbase
- Binance
- Gemini
- LINK
- GDAX
Binance is currently the largest centralized exchange in the world in terms of daily trading volume of cryptocurrencies
Decentralized exchange:
Decentralized exchanges also known as DEX are exchanges that do not govern or pose as third parties to transactions between users. Instead, they allow for peer to peer transaction of assets between buyers and sellers thus upholding the decentralized nature of cryptocurrency. Decentralized exchanges are trustless exchanges in the sense that less personal information from users are required for transaction. Decentralized exchanges, however do not allow for trading of fiat currency for cryptocurrency.
Examples of decentralized exchanges;
- Blocknet
- UNISWAP
- Airswap
- Swop.fi
- Pancake swap
As of October 2020, Uniswap was estimated to be the largest decentralized exchange and the fourth-largest cryptocurrency exchange overall by daily trading volume.
DIFFERENCES BETWEEN A WALLET AND AN EXCHANGE
Before diving into the differences, since the understanding what an exchange is has already been accomplished, it is important we get to understand what a wallet is in cryptocurrency.
What is a wallet?
A wallet is a digital purse that houses cryptocurrencies or any other assets. It manages and safe guards a user's assets which can be accessed through the use of keys. These keys are usually in the form of a phrasal code or a really strong password that only the user knows, which he can also use to validate his transactions.
A wallet allows for the smooth interchange of cryptocurrencies back to fiat currencies and fiats back to cryptocurrency.
Wallets are classified into three and these classifications are; hot wallet, cold wallets and hardware wallets.
Cold wallet:
This is a kind of wallet is not connected to the Internet, In the sense that its keys are downloaded and then written down on a paper which is then stored for safekeeping. These kinds of wallets are not susceptible to hacking but its problem is that, crypto assets are accessed online and the idea of always having to bring out your keys to access your funds and put them back inconveniences users and these keys risks being lost either in the form of carelessness or attack of physical elements like water and fire.
A typical example of cold wallets is the paper wallet.
Hot wallet:
Hot wallets are wallets that are connected to the internet which means easier transactions for users. Due to its nature, hot wallets a susceptible to hackers since its keys are online though its assets that it holds can be properly protected through saving of keys in an app that has a "two step verification” which is an two step authentication method that prevents hackers from infiltrating a users funds.
Hot wallets could be subdivided into; exchange wallets, mobile wallets and desktop wallet. Some example of hot wallets include; trust wallet, luno wallet, Coinbase etc.
Hardware wallets:
Hardware wallets are wallets that makes use of cold wallets idea of safety and combines it with the easy access of hot wallets. Here, keys are copied and stored in hardware devices. Therefore crypto assets are only accessed when these hardware devices are connected either to a user's PC or desktop depending on the users choice of use. Though hardware wallets are very secure but they are expensive and quite difficult to use as a beginner. Some examples are; ledger nano x, Trezor
Differences between wallets and exchanges
| Wallet | Exchanges |
|---|---|
| Specifically for the deposition of assets for safekeeping | it is a platform that enables buying and selling of cryptocurrencies |
| Wallets do not allow for trading which includes buying and selling of cryptocurrencies | exchanges are built for the purpose of buying and selling between users/traders |
| Wallets gives users sole ownership of its keys which is used to Safeguard and access funds | some exchanges due to its centralized nature, do not give users sole ownership of his keys. |
| Wallets requires just private keys for access to its funds | Exchanges requires more than keys, it requires other means of verification like KYC verification before certain operations can be performed |
ADVANTAGES AND DISADVANTAGES OF CEX
Advantages
It allows for the deposition of fiat currency
In any case of lost password, assets in a centralized exchange can be recovered
Centralized exchanges offer better security for smooth transaction between buyer and seller
Users making use of centralized exchanges will get the funds returned if there is any case of hacking
Disadvantages
Centralized exchanges are more prone to hacking due to it being owned by a company
There is no anonymity between users, hence taking away the very reason for cryptocurrency
In centralized exchanges transaction fee is required for every transaction made.
ADVANTAGES AND DISADVANTAGES OF DEX
Advantages
Transactions in decentralized exchanges are anonymous due to its decentralized nature. Hence there is high level of security
Due to decentralization, decentralized exchanges are not prone to hacking because it does not allow interference from third party
Decentralized exchanges makes use of peer to peer transactions which in turn prevents the oversell of cryptocurrency.
In decentralized exchanges, all coin tokens can be traded or held.
Disadvantages
if password Is lost there is no way to recover them
Decentralized exchanges suffer from lower liquidity due to them not allowing exchange from fiat currency
Trading is minimized in decentralized exchanges with advanced trading options unavailable.
HAVE YOU USED AN EXCHANGE BEFORE? TELL US ABOUT YOUR EXPERIENCE
I have used both type of exchanges; decentralized and centralized in the form of pancake swap and binance respectively. My run in with pancake swap was when I was new to the crypto business earlier this year when I was trying to swap my BNB to safemoon in order to HODL. Though I could make the transaction myself because I didn't know what to do, so the transaction was made for me.
Like they say, “experience is the best teacher”, I tried again to make another transaction myself this time while swapping my BNB for feg token and I nailed it.
My transactions using the centralized exchange “binance”, was quite easier, first reason being my increased experience in cryptocurrency and its centralized nature, though cryptocurrency being banned in my country I made a P2P transaction on binance and purchased USDT which was then swapped for Shiba inu.
Thank you for reading;
Professor @imagen