What is Decentralized Exchange?
Decentralized exchange – It is platforms and applications, which allows traders buy, sell and exchange cryptocurrencies for fiat money or other cryptocurrencies.
Such exchanges – Trading areas for tokens and they have great value for digital currencies ecosystem because many of them accept fiat money (you can buy cryptocurrencies with dollars, euros etc.)
How do they Work?
Trade and speculation operations at crypto exchanges identical to those on classical exchanges. You need to buy low and sell high to get profit, just like with investments in fiat money.
In most cases, crypto enthusiasts do not limit themselves with only one trade platform.
For example one crypto exchange used for day to day trade high liquidity assets, second for trading with high liquidity altcoins, third platform for buying new security tokens for holding, and fourth for buying and selling crypto tokens etc. Choosing the best cryptocurrency exchange is very important for future success in crypto trading.
– opinion expressed by creator Ethereum Vitalik Buterin himself during his talk on CCSI Blockchain 2018 event 6 July in Zug, Switzerland.
What are the Differences Between Cryptocurrency Exchanges?
At this day there are about 200 exchanges in the world total. Most famous and most visited centralized exchanges — are Bithumb, Bitfinex, Bittrex, Poloniex, Kraken, GDAX, Coinbase, Gemini.
Each has they own advantages and disadvantages. For example, some exchanges stand out having a big set of currency pairs, some having easy to use, convenient interface, other – wide functionality, and variety of instruments for technical and graphical analysis, quicker than other add new tokens shortly after ICO, or even offer safe crypotwallers, etc.
In general, exchanges utilize the same principles but vary in functionality and capabilities trying to attract as many users as possible with the unique features.
From uses point of view the most important differences are:
- Choose of Cryptocurrencies – At some exchanges only most popular currencies are traded, when other have dozens and hundreds of currency pairs.
- Cryptocurrency Withdrawal – At some trading platform user can withdraw only Bitcoin, Litecoin and few other widespread coins, in same time other will allow withdraw dozens of currencies and five fiat currencies on top of that.
- Ability to Deposit and Withdraw Fiat Money – Certain exchanges work only with cryptocurrencies and not offer such functionality.
- Commision – Mostly charged from closed deal. May be charged from seller only, from seller and buyer. Of course there may be other commision.
- User Data– Standard requirements may ask just for users email. But possible to be extended to full verification procedure. When user need provide scan copy of ID and/or other documents.
- Account Protection – Vary from simple password to complex verification system with 2FA.
- Ways for Deposit and Withdrawal – Way may as limited as just few payment system. But may allow user withdraw funds via bank transfer or payment card.
- Daily Trading Volume – Depends on popularity of exchange and listed currencies. It may be more then 2 billions USD or not even reach 10 thousands USD.
What are the Flaws of Centralized Exchanges?
Without exceptions, all centralized exchanges have one common flaw. The very concept of centralization neglects many benefits which blockchain provides.
Working via a centralized exchange user cannot fully control the assets. De facto the operate only with numbers, which exchange show on the accounts. There are other inconveniences too:
- Security Issues – Huge influx of users frequently causes system overload and attracts attention of hackers. According to CipherTrace (American cybersecurity company) report only in the first half of 2018 from cryptocurrencies were stolen around $761 million.
This number three times bigger compared to the whole 2017 year ($266 million). Company estimates, that till the end of the year centralized exchanges will lose from hacker attacks around $1.5 billion.
- Insufficient liquidity – Big exchange order not always could be closed. Even with Even with record high prices for cryptocurrencies trading volumes may be low (compared to the traditional markets).
- Fragmented Market (but not decentralized) – Global liquidity separated between several main markets. There is no apparent leader (comparing trading volumes) which aggravates liquidity problem.
- High Risks – For centralized exchange there is always risk of intervention from state organizations and accounts freeze. Different jurisdictions approach crypto exchanges regulations differently.
Crypto trading may be banned completely (like in China), allowed only for verification users (in South Korea actively fight against anonymous traders).
Such details influence trading – Exchange will pay great attention to users activity because regulators demands for reports.
An exchange may be in contact threat of closing, in disputed situation withdraw of assets may take a long time.
- Lack of Trust and Transparency – Trading process itself not transparent. Actual cost of it very high, even higher then specified commision.
Accompanied by transactions delays. Exchanges just could not handle pick demand in right way. Exchanges could cut the line and illegally be executing they own orders.
- Lack of Qualification Users – Marker over flooded with speculators and profiteers. They poorly understood how safely handle cryptocurrencies and trading right way.
- High Commissions – Despite trading at exchange on his own risk, user still paying exchange huge commissions for operation with cryptocurrencies. Deposition and withdrawal of funds also get charged with fees.
Is there any Alternatives?
Lack of proper security, transparency, and independence from third parties among centralized exchanges leads to increased interest in decentralized exchanges. Nowadays we see more and more decentralized exchanges which work by new rules.
In the foundation of such platforms, there is no place for the third party.
All handled by decentralized smart contracts, which track all transactions. This makes decentralized exchanges much faster, because transaction verification on the centralized platform may take from several days to several months.
The main idea of such platform – full anonymity and equal possibilities for all participants. Such an exchange cannot be controlled by the state or any regulators, and no personal data could leak.
Investors and traders may not worry about hacking or technical malfunctioning. All funds and key stored at the user side. Decentralization makes impossible artificial manipulation with exchange and fake orders creation.
What are the Simple Security Measures for Everybody?
Exchanges and regulators constantly working on measures to decrease the scale of cyber crimes. In same time crypto market player forced to take care of the assets with extra caution.
Here are 7 simple ways, which allow you add more layers of protection for your crypto assets.
- Never keep crypto currencies at the exchange for a long time.
- Use maximum possible ways of protection at crypto exchange: two factor authentication, multi signature, etc.
- Do not store files for access to wallet on home computer, which connected to the internet. Use cryptocurrency ledger wallet and keep it in safe place.
- Do not use online wallets. With the exception of those, which act as an online interface like MyEtherWallet. Take a look at cold storage solutions.
- Check addresses of the sites you are visiting, especially if we talk about crypto exchanges and similar services. Fishing attacks are still common.
- For Initial Coin Offering Investment, always check smart contract address on which you are going to transfer crypto. Use only data from official sources.
- Monitor current safety and market situation. Join trusted crypto telegram channels, to receive up to date information. It will allow you to keep your assets safe and multiply them. Communicate with other traders and learn.
Although decentralized exchanges not as popular as a classical one, they move the crypto community in the right direction away from centralization.
In a current market state such they influence should not be underestimated, as they soon could and will make even the biggest centralized exchanges obsolete.
Centralized exchanges have high-security requirements for the user, in the same time not able guaranty funds safety. Centralized exchanges is a step back for blockchain evolution and cryptocurrencies spread in the economy.
Take a look at decentralized exchanges and try for yourself how they work. And while you keep working on centralized one not forget to follow safety rules described in the article.
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