Crypto Academy Season 4 Beginners' course - Homework post for Task 7: Dex, Cex, Popular Exchanges and Trading Cryptos || By @usmanismail882 ||club5050
Introduction
Good day everyone, how are you all doing?. I'm very happy to be part of those opportune to participate in this beginners' homework post for task 7 which is about Dex, Cex, Popular Exchanges, and Trading Cryptos, thanks to prof @imagen for his wonderful explanation on this course which enlightens me more about the difference between DEX and CEX exchange.
QUESTION THREE
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.
What is an Exchange?
An exchange can be said to be a marketplace where all kinds of commodities and other financial instruments is traded, in cryptocurrency exchange can also be described as a place used for trading all kinds of crypto coins, in this type of exchange every individual can also swap different types of coins or each individual can even change fiat for crypto or crypto for fiat, this exchange could be done via a centralized network or through a decentralized network.
The main function of the cryptocurrency exchange is to build a platform where every user can make an exchange without the fear of being watched or monitored, also to provide adequate security, to make sure fair and orderly trading is conducted when every individual is performing his/her respective trades. And we have a few exchange apps which are created to make the exchange more decentralized and safer for every user use, I will be listing some of these developed apps below;
- Binance
- Huobi Global
- Poloni DEX
- Coinbase
The purpose of creating all these decentralized exchange platforms is to create an atmosphere where each person that is conducting any type of transaction can do so with a mind free of worry that he or she isn't safe in any way, this platform strictly adheres to users privacy, making users be fully in charge of their respective transactions. And exchange can also either be a Centralized type of exchange (CEX) or a Decentralized type of exchange(DEX).
Centralized exchange
A centralized exchange can be said to be a type of exchange where a middle man or a third party will be involved in any type of exchange made on this kind of system, this also shows that in this type of system, The users trust the middle man or the third party with their respective exchange or asset that is involved. A common example of this kind of exchange setup is our various local banks that we make use of, where our fiat currencies, other valuable things are kept in the care of the middle man with the trust of getting it whenever you need it.
Decentralized exchange
A decentralized exchange system is a peer-to-peer system that connects cryptocurrency users, where users don't have to place their trust in anybody when making an exchange because the system is built in a way that no buyer will be able to cheat the other. After all, all transactions record is been made visible for all users to view in order not to have any misconduct in each exchange.
Difference Between a Wallet and an Exchange
To a layman's understanding, A wallet can be viewed as a place that you temporarily save your money to be able to get access to it easily when you need it again, this helps us to understand the concept behind the creation of other types of wallets.
- Cryptocurrency Wallet: A cryptocurrency wallet can be said to be a storage app that is used to store and receive cryptocurrency, every individual wallet has a unique key that is used to get access to such wallets.
This unique key that will be given to each user when opening a wallet account, makes it impossible for others to get access to your wallet without this key because of how strong the security of the wallet is, this also makes it dangerous for the owner of the wallet in a way because when a user lost his or her private key which was supposed to be used to get access to the account, then this user will lose access to his or her account never to be retrieved again without the key.
While on the other hand an exchange can be viewed as a marketplace where every individual can exchange and buy their crypto coins, in this kind of marketplace place users can swap different kinds of coins with their appropriate values. The exchange platform also makes it much easier for its users to get access to information, which also makes it much easier for trading.
Below t, I will be making a corresponding table that will differentiate a wallet and an exchange better.
| characteristics | cryptocurrency Wallet | cryptocurrency Exchange |
|---|---|---|
| Main Function | crypto storage | Crypto trading |
| Access to Key | wallet allows users to fully control their private keys | In exchange, you are not given full access of your prive keys |
| offer features | wallet does not offer any features for either buying or selling | while exchange has features where they advertise, also offer buying and selling |
| Pupose of operation | Wallet are basically created for storing and securing your digital currencies for a long time | While in exchange, they main purpose is to provide a platform for buying, selling, and exchange of cryptocurrencies |
| Control | In wallet, a user has full control over their wallet | While in exchange, they were not given full control over their funds |
Advantages and Disadvantages of Decentralized Exchange (DEX)
As said earlier a decentralized exchange is an exchange that is free from the influence of a third party, where all transactions are done on the system by the user through a peer-to-peer exchange which depends on a smart contract to complete each transaction, also all users have their private key for the transaction.
Advantages
Anonymity: It makes it in a way that users can complete a purchase using only their wallet address and payment details, which means traders don't need to give away the control of private keys to make a transaction.
Privacy: A decentralized exchange system has a high level of privacy because Traders using decentralized exchanges don’t need to disclose their private keys when doing a transaction, their wallets are held externally.
Due to the system using a peer-to-peer exchange system, it makes it very difficult for any individual or organization to manipulate any transaction that occurs in a decentralized system, which also protects users from fake trading and washes trading.
In a decentralized exchange system, users don't have to transfer their assets to any third party, each user can manage their wallets without the fear of losing their assets or being hacked, also and users are assured of greater safety from hacking and theft.
Lower fee: Decentralized exchange system run a very low-cost system through the use of the smart contract.
Disadvantages
Because of how new the system is, it makes it face market segregation which also has a negative impact on market liquidity.
In a cryptocurrency system, scalability depends on the number of transactions a network can process before reaching capacity.
Decentralized exchange systems are not always user-friendly, because the network is at its early stages of development and can be challenging to use for those less familiar with the system.
one of the disadvantages of a decentralized system is that it's uninsured, so if you lost your private key which is used, your account cannot be open without it which also means that all the coins you have in your account will be gone forever.
In a decentralized exchange system, each user must remember their private key and password to their wallet, because losing their private key means that all their asset will be lost forever without any form of being recovered. A decentralized system expects every user to get familiar with their platform and every process involved in it.
In a decentralized exchange system, users are unable to make use of fiat payment which means that you cannot change fiat currency to a digital one, which also limits their mode of transactions, also makes it very inconvenient for users that don't have a crypto coin yet to make a transaction.
Advantages and Disadvantages of centralized Exchange (CEX)
As for the centralized exchange system, can be said to be a type of exchange where a middle man or a third party will be involved in any type of exchange made on this kind of system, this also shows that in this type of system. The users trust the middle man or the third party with their respective exchange or asset that is involved. A common example of this kind of exchange setup is our various local banks that we make use of, where our fiat currencies, other valuable things are kept in the care of the middle man with the trust of getting it whenever you need it.
Advantages
Centralized exchange system has a higher rate of trade compared to DCE because it's been out for a long and a lot of organizations are still making use of it.
Centralized exchange system has a higher rate of liquidity because it has a long time accumulation.
Because of how stable it is, a centralized exchange system never really face much of a decline, millions of people signing up on Cex.
Centralized exchange system has a much higher volume of trading, this also shows how long of an accumulation it has.
Speed: Fast transaction speeds on centralized exchanges system contribute to better user experiences as well as enable complex trade types
A centralized exchange system is user-friendly, also offers those who are new to the system an atmosphere that will help them to familiarize themselves on how to trade cryptocurrency, this helps users to log into their accounts, view their account balances, and make transactions through applications and websites.
Disadvantages
This type of system is most vulnerable to cyber-attack because of how open the system is, all keys are been stored in the exchange which makes it to be defenseless when been hacked.
The time it takes for a transition is very long because it has to wait for the approval of the third party before getting your transaction done, this makes it take a long time before the transaction will be put through.
In a centralized exchange, they are a high risk of manipulation of transactions due to a lack of transparency, this also makes lots of investors to lost interest in operating a centralized system.
lack of educated users, this makes the market to be flooded with just speculators, those that are unaware of the safe way to go around the market, which also makes lots of users lose money.
The cost of transactions in a centralized exchange system is very high, unlike the exchange system that uses peer-to-peer transactions. The centralized systems always charge higher fees for using their service to run your transactions.
Have you used an Exchange before. What's the Experience?
__
Yes, I have use an exchange before and the exchange which I am more familiar with is the Binance Exchange which is a centralized exchange, I made use of this exchange more die to its simplicity in carding out a trade which I will later be showing illustration of and as well I use the exchange because it support a fiat to crypto I. E I can easily convert my real money into a crypto asset within a short period of time and I can as well decide to do the opposite at an instant execution.
My experience with an exchange
I will be showing illustration of how I did carry out an exchange on the binance, the exchange which I did sell my TRX to usdt in the market pair.
Step 1 - I Log in to my binance with username and password, then at the down tab I select Trade.
Step2 - Since I am choosing to sell my Trx I search for the pair of Trx/usdt then I went to the sell side, which I did decide to sell the maximum balance of my TRX which is 166trx in exchange for 16usdt
Step3: Then the moment I click on sell, in just few seconds my order was filled in which I did open my history records and saw order been filled in just seconds.
That was the conclusion of my transaction and
I as well went to my wallet to confirm if my 16usd is already reflecting In my wallet, which indeed was reflecting in just few seconds
Conclusion
Cryptocurrency exchange can be described as a place used for trading all kinds of crypto coins, in this type of exchange every individual can also swap different types of coins or each individual can even change fiat for crypto or crypto for fiat. This exchange could be done via a centralized network or through a decentralized network. In a centralized network, it shows that it is less secure than a decentralized network because in a centralized network, a third party will be involved which shows that it takes a longer period of time before the transaction will be put through. while in a decentralized system, it runs a trustless system where users don't have to place their trust in the other party because all transactions will be visible for both sides to see, there is no middle man involved in their transaction.
Prof @dilchamo, during your last review on my post you miss me out for #club5050 mark, which I did call your attention to but no response, I hope I get to be check through this time. Thank You!!
#club5050 😀