Good day everybody,
Welcome to CryptoGod-1's blog on all things crypto. Today we are going to look at some of the main crypto-based exchanges and the main features each has to offer its users. While most are based on the same idea and have many similar functions, there are some unique features specific to each. This will not be an exhaustive list of all exchanges, merely touching on some of the Centralised and Decentralised exchanges available.
Centralized Exchanges(CEX) vs Decentralised Exchanges(DEX)
These terms are frequently used within the world of crypto but can be confusing to some newcomers, and even some veterans who never delved too deep into learning the terminology. They are both types of exchanges but fundamentally work in different ways. The main difference between them is how they work and how they are used, and both come with their own advantages and disadvantages.
Centralized Exchanges (CEX)
Many users will be more familiar with CEX's as they are the most popular way of trading cryptocurrencies. They work as a platform for trading crypto and are created by a centralized organization company acting as a third party. The organization allows its users to purchase crypto for fiat, trade between two crypto types, store crypto and fiat assets, while they also ensure to regulate the exchanges and charge fees for doing so.
The CEX's are built in a user-friendly way, meaning they are generally very attractive to new users of crypto. Due to this interface, purchasing and managing digital currencies is extremely simple in almost all CEX's. The exchange process happens via order books, and users can place a limit or market order to obtain their desired currency. This creates a price for a specific cryptocurrency based on current buy and sells orders, and due to their popularity, the CEX's tend to have a high trading volume compared to a DEX. This high trading volume results in high liquidity, ensuring a user can easily transfer their crypto to another exchange or wallet, or convert it into cash or other cryptocurrencies. Liquidity is a very important factor in exchanges for many reasons, as it helps to ensure the consumer will have access to their coins, therefore making a crypto exchange less vulnerable to market manipulation.
Most CEX not only function as a crypto trading platform, but they also provide other beneficial services or features, such as margin trading, crypto derivatives trading, exchange staking, and margin lending. The above-mentioned user-friendly interfaces mean the CEX also provides easy and uncomplicated access to the respective trading options they offer. The centralized organization behind the exchanges means they can process a large number of transactions. These are processed fast and almost in real-time, allowing traders to react immediately to any changes in the market.
One common theory in crypto is for traders who plan on holding their crypto assets long-term to move their coins off the exchange. The main reason behind this is because a CEX can store their user's crypto asset, generally within integrated wallets as a part of their system, the user does not have full access to their coins or keys. This means that users are putting their trust in the CEX not to go bankrupt and liquidate all their coins, lose them without refunding the customers, or succumb to being a prime target for cybercriminals.
Another drawback of a CEX is due to the fact they are centralized, they are under the control of government regulations. Most countries require exchanges to provide data on their customers in anti-money laundering operations known as "know your customer" or KYC. As many crypto users are involved in cryptocurrencies due to their anti-establishment nature, this regulation is contrary to the fundamental ideas of cryptocurrencies.
- High trading volume and high liquidity
- Fiat-cryptocurrency trading
- High level of functionality
- User friendly with fast transactions
- Require Know-Your-Customer (KYC) as they are under government regulation
- Higher possibility of hacking compared to DEX
Decentralized Exchanges (DEX)
Generally a daunting task for newcomers to the world of crypto, DEX's are a system free of any centralized control. Instead, every trade made on a DEX is governed via a smart contract and automated procedures. The use of these smart contracts ensures the DEX remains decentralized and means instant and low fee transactions. Due to the fact the DEX is not a centralized organization, they are deemed more secure than a CEX against hackers and cybercriminals. On top of this, the lack of requirement for identity or verification means there is no risk of a data leak containing the user's private information.
A key advantage to a DEX unlike a CEX is that thanks to the non-centralized framework, every user has full control and access to their private keys, giving true ownership over any coins or tokens purchased by the user. On top of this, the access and availability of Decentralized Finance (DeFi) products has ensured that DEX's have increased in popularity. This integration along with NFT's, although many CEX's are moving into the NFT marketplace, helps add additional DApps for users to enjoy and enhance their experience.
The fact that most DEX's are where new coins get initially available is what draws many people with hope and aspirations into the DEX space. These coins and tokens are generally not listed on a CEX until they have proven themselves in the marketplace, and if users want to get in early on a project then a DEX is their way forward. Anyone has the capability of creating a token on Ethereum or other networks and creating a liquidity pool within a DEX to expand its growth.
Finally, as DEX's are non-centralized, there is little to no risk of a government applying regulations or enforcing the closure of the DEX. This gives users added security in knowing they won't wake up to discover their exchange is no longer a legal entity within their state, or that it has been forced into closure because of regulations or non-adherence to guidelines.
Unfortunately, unlike CEX's, the user interface of most DEX's can be somewhat complicated for newcomers. This can create an image of difficulty and even deter some users from utilizing their facilities. They can be complicated for the inexperienced, with the generic function of limit orders, stop losses, and margin trades just a few examples of what's not available on a DEX compared to a CEX. Many DEX's are improving this part of their setup, to compete and somewhat integrate the functions of a CEX in a hybrid way. Another drawback can be the lower level of liquidity compared with a CEX, although the rapid growth of DeFi has helped to increase asset liquidity on many DEX's.
- High security from hacking
- Low-cost fee
- A wide variety of coins and tokens
- No third party fraud
- No government regulations such as KYC
- Lower liquidity generally compared to CEX
- Generally less user-friendly interface
Selection of Centralised Exchanges (CEX)
Binance - As one of the leading exchanges in Crypto, Binance was founded in 2017 in Hong Kong by Changpeng Zhao. It primarily has crypto to crypto trading and has some of the lowest transaction fees for CEX's. Binance offers services around the trading, listing, fundraising, and de-listing or withdrawal of cryptocurrencies. It also allows users to staking their coins and tokens to earn interest in standard staking or liquid swaps, derivatives trading, margin lending, launchpad for new and emerging blockchain projects, and has its own token known as Binance Coin (BNB). Binance has also recently moved into the NFT space and has its own marketplace available, while it offers smart pool services to enable mining different cryptocurrencies. Finally, they have a credit card option to enable users to convert their cryptocurrency into fiat currency and spend it on products and services.
Crypto.com - With this CEX, users have the ability to purchase, sell, and trade an extensive list of currencies while enjoying a relatively low trading fee. On top of that the CEX offers crypto credit cards, a standalone crypto wallet, staking, and an NFT marketplace. Founded in 2016 in Hong Kong, it currently offers more than 150 cryptocurrencies to customers worldwide. Due to the extensive list of features available, it is generally seen as a CEX option best for people who feel confident managing their assets via a mobile app, and is ideal for those with intermediate cryptocurrency knowledge and experience.
Coinbase - Coinbase is a trading platform which offer the optiosn of buying, selling, and exchaning over 100 different cryptocurrencies, and has over 73 millions users. Coinbase is good for beginners due to its simple interface and options for making buying and selling orders, although Coinbase Pro is a better option due to its cheaper fees. Founded in 2012, it also offers options for staking and Coinbase Earn to learn and earn new currencies. Available on web and mobile, it is easy to learn for new customers and inexperienced crypto traders. Security wise, 98% of customer assets are stored offline using cold storage in a network of safe deposit boxes around the world, supported by digital and paper backups.
Kraken - Kraken was opened in 2011, and launched trading operations in 2013 after being established by its CEO co-founder Jesse Powell. This CEX allows it users to buy, sell, and trade cryptocurrencies, stop loss and profit taking option, leveraged option, while also offering its users margin accounts and futures trading. Kraken supports a wide range of currencies, with a simple user interface, although they are limited in their selection of altcoins compared to competitors and are known for high trading fees when not using Kraken Pro. It is aimed more for experienced traders and can be somewhat daunting for newcomers to the crypto space.
Gemini - Gemini is a privately-owned CEX which allows its users to buy, sell, trade, and securely store cryptocurrencies. It was launched in 2015 by Cameron and Tyler Winklevoss. It works with a tiered service, meaning there are separate interfaces and different fee structures set up for casual investors and largescale traders. Gemini differs from other CEX's with its variety of market order types, including immediate or cancel (IOC), maker or cancel (MOC), and auction-only (AO). They also do not allow for options in margin trading or shorting of cryptocurrencies. Gemini's focuses primarily on its user's security by ensuring the majority of their crypto is stored in offline "cold storage" and any money in the online "hot wallet" is held in an insured account.
Selection of Decentralised Exchanges (DEX)
Uniswap - The DEX known as Uniswap is a decentralized finance protocol that is used for automated transactions and the provision of cryptocurrency trading on Ethereum Blockchain. This is achieved through the use of smart contracts. Founded in late 2018 by Hayden Adams, the name Uniswap is also the name of the company which initially built the Uniswap protocol. Uniswap has worked to solve the issue of high spreads on regular CEX's by creating a function where every user is able to become a market maker. Liquidity management is a known problem that can have detrimental effects and even lead to the collapse of the largest cryptocurrencies. With automated market maker (AMM) technology, Uniswap addresses these issues in a stable manner which inspires confidence in its protocol. The Uniswap team has also announced it is adding up to 300 new products to its network, which will mean a lot more utility for its native token UNI.
Sushi Swap - This DEX is also a decentralized protocol that provides automated liquidity on Ethereum Blockchain. Launched in late August 2020 by an anonymous developer known under the pseudonym Chef Nomi, Sushiswap is a forked version of Uniswap's code, meaning they are both created from the same code. It is a DEX that allows users to swap, farm, stake, lend, and borrow cryptocurrencies. Another AMM, Sushiswap drew attention from Uniswap when it launched and also suffered a rug pull from it creator within the first week, but he returned and the DEX has since gone on to announce a merger with Yearn.finance where they share development resources while maintaining separate tokens and governance systems. While Uniswap pays a higher fee to its liquidity providers, 0.3 percent vs. 0.25 percent for SushiSwap, the advantage of Sushiswap is those holders of SUSHI also receive an additional 0.05 percent return.
Pancake Swap - Another AMM, this DApp is based on the Binance Smart Chain (BSC) and launched in September 2020. A fork of Sushiswap, it is cheaper than the aforementioned DEX as it operates on BSC instead of the Ethereum Blockchain. Pancake swap offers yield farming, lotteries, and initial farm offerings to its users. The governance token of Pancakeswap is known as CAKE, and was launched on the Binance Smart Chain. Its function is similar to Unisawp and Sushiswap in incentivizing liquidity provision to the platform. This DEX is a great utility for finding new tokens and ones which have not yet made it to the tier 1 exchanges. A huge number of new tokens join the DEX daily and while not all make it, it certainly provides a large market space for sourcing the newest coins and tokens. The team behind Pancakeswap is completely anonymous, although it is believed to have more than a dozen members, and has been audited by several prominent blockchain security firms — including Certik and Slowmist.
Curve - Curve Finance is a DEX on the Ethereum Blockchain. It was launched in August 2020 by Russian physicist Michael Egorov. It is specifically designed for the efficient and low slippage of stable coin trading, built on the Ethereum Blockchain. Slippage is the change that happens between the expected price and the actual price at the time the trade is executed. Curve has become the best place to exchange stable coins due to the fact most CEX's will charge high fees when making these trades. The liquidity pools provide high annual interest returns on cryptocurrency funds deposited into Curve. Their native token is CRV, and while Curve Finance does not have any defined roadmap, they are contemplating adding more cryptocurrencies not just stable coins or wrapped versions of Bitcoin.
Balancer - Balancer is a non-custodial automated portfolio manager and trading platform. In a conventional index fund, the investor pays fees to a portfolio manager for rebalancing the portfolio. In Balancer, the investor collects fees from traders who rebalance their portfolio by following arbitrage opportunities. The governing token for Balancer is BAL, and the Balancer pool is the main principal of the Balancer Protocol. These pools work as the smart contracts which ensure the proper functioning of the Balancer Protocol. Balancer pools are started through using two or more ERC20 tokens, up to a maximum of eight tokens. There are two categories of pools within the protocol, the Finalized/Public and the Controlled/Private. Basically the Balancer Protocol is an AMM which has unique feature allowing the creation a pool with multiple assets, different weights, and with customizable swap fees. This is what makes the Balancer Protocol more flexible than many other AMM's on the market.
Whether you choose to do your trading on a CEX or DEX is completely up to your individual needs. Both have their advantages and disadvantages, with CEX's offering a user-friendly and quick transaction procedure but under a centralized body compared to DEX's wide variety of tokens and higher safety from third-party hacking and fraud. Investors should determine whether they need a CEX or DEX for their exchanges, and look into the selection of each available. Most traders have an exchange of preference although many trades on multiple CEX's and/or DEX's. Ensuring you find the correct one for your needs is the key to enjoying your experience with your chosen exchange.
I have also previously done a write up on Crypto Wallets if you would like to check that out here: Crypto Wallets
I hope you enjoyed the read and found it of interest, have a wonderful day.
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