Nowadays it is possible to buy and sell cryptocurrencies in a fairly simple way, as there are different types of platforms for this purpose. We will see the characteristics and the differences between centralized and decentralized cryptocurrency exchanges.
What is an exchange
It is a digital platform that allows online negotiations of different cryptocurrencies. Within an exchange we can order operations of buying and selling cryptocurrencies, and exchange between cryptocurrencies, fiat, or tokens. The exchanges can be centralized, controlled by a company that safeguards the users’ assets, or decentralized, they are not controlled by anyone and each user can always own their cryptocurrencies.
The task of exchanges is to facilitate the purchase, sale and exchange of cryptocurrencies and tokens. They are usually characterized by implementing relatively user-friendly interfaces. Many add special functions when creating orders, such as “stop loss”, which allows to reduce losses if a cryptocurrency drops suddenly.
Origin of cryptocurrency exchanges
Before the first appearance of an exchange, the first process of exchanging Bitcoin for fiat money was generated in autumn 2009. The forum member Bitcointalk, with the username NewLibertyStandard, indicated the need for a website where to buy and sell money with real money. A topic that Martti Malmi and Satoshi Nakamoto have been discussing for some time.
To support NewLibertyStandard’s initiative, Malmi sent NewLibertyStandard the amount of 5,050 BTC. In exchange for this number of bitcoins, Malmi received from NewLibertyStandard the sum of 5.02 USD via the PayPal platform. As far as is known, this is the first exchange of bitcoins for fiat.
Types of exchanges that exist
We can sort the different types of cryptocurrency platform formats according to certain characteristics. All of them start from the basis of making it easier for users to buy, sell and exchange cryptocurrencies and tokens, but not all of them do it in the same way.
Centralized Exchange (CEX)
Some of the characteristics of cryptocurrencies are privacy, security, decentralization, and no need for trusted third parties. Exchanges are non-private, centralized platforms where funds are managed by third parties that we expect to be secure and reliable.
Centralized exchanges rely on trusted third parties, who mediate the trading of the platform’s users. To access these platforms, you need to pass the “know your customer (KYC)” and “anti-money laundering (AML)” checks. Not only this, but exchanges often share information with the tax authorities of different countries. Regarding security, here we must trust that they have good security measures.
Those who manage the exchange are also the ones who set the commissions to be paid on the platform to carry out transactions. Part of these commissions is used to pay the transaction commission to the network, part for the maintenance of the platform and the rest are profits. Additionally, exchanges usually establish a minimum for the purchase or exchange of cryptocurrencies, as well as minimums for the withdrawal of cryptocurrencies.
Some of the most important international exchanges are Coinbase, Binance, Bittrex, Poloniex or Kraken, among others.
Decentralized Exchange (DEX)
They are a type of exchange where there is no reliable third party. These types of platforms are usually developed on a blockchain using smart contracts, with most DEX being deployed on Ethereum. As there is no trusted third party, exchanges are made directly between peers (P2P). Another advantage of having no trusted third party is that commissions are usually zero or practically zero.
There is no loss of privacy, since for these platforms it is not necessary to go through KYC and AML processes, you simply must register. Remember at this point that the exchanges are also peer-to-peer, which ensures privacy.
Some of the best-known decentralized exchanges are EtherDelta, 0x, Waves, Uniswap, SushiSwap and Bitsquare, Venice Swap among others.
Advantages of decentralized exchanges
- Users are always the owners of the funds.
- There is great privacy, as there is no need to disclose personal information to access the platform.
- Commissions for transactions are practically or totally null.
- There are no reliable third parties
- There is usually greater security, as it is open source and easily auditable.
- Metamask allows easy exchange between different tokens on the Ethereum blockchain and between ether and tokens and vice versa.
Disadvantages of decentralized exchanges
- May not be very easy to use for first-time users
- They offer less operational possibilities compared to centralized exchanges
- Supply and demand are usually more limited
- Only cryptocurrencies and tokens from the same blockchain can be exchanged. Most are built on the Ethereum network, so we can only trade between tokens from the Ethereum blockchain and ether, the network’s currency.
These are platforms that allow users to exchange cryptocurrencies easily and quickly for others of their choice. These platforms focus on guiding the user towards the purchase of a reduced offer of cryptocurrency types. Cryptocurrency brokers are characterized by being very easy to use, ideal for novice users. We have within this range platforms such as Shapeshift and Changelly.
OTC (Over the Counter)
This is another variant of cryptocurrency exchange that exist and are quite like conventional OTC platforms. OTCs are characterized by being platforms for peer-to-peer exchanges between buyers and sellers. They offer us these exchange platforms where the negotiation is direct between the two parties. It also provides a high level of privacy and the ability to negotiate even the price of the cryptocurrencies to be exchanged. Some of the most interesting platforms are itBit, Kraken OTC Dexk or BitStocks.
They are not strictly speaking exchanges, but they are a mechanism for acquiring or investing in cryptocurrencies. This type of fund is managed by professionals who make access to cryptocurrencies easier and simpler. Within these funds we can buy or sell cryptocurrencies in a very simplified way. In addition, the user does not need to store and buy them in a very simple way.
This type of fund eliminates privacy by requiring KYC and AML processes. The funds are also not under the user’s control, which means that in the event of a computer attack or mismanagement of the funds we can lose all our money. We must always know to whom we give our money, as it may be the case that there are no experienced professionals behind these platforms.
How an exchange works
The operation is the same as the fiduciary money exchange houses, but in this case it operates with cryptocurrencies. Some cryptocurrency exchanges add the option to trade with fiat money and stablecoins.
Before starting to operate with cryptocurrencies, we must choose between a CEX and a DEX. We must know the characteristics and particularities of these, something that we have already explained a little.
Regarding the operation, what we must do is to initiate a request to the chosen exchange to start trading. In case we want to make a purchase, we must check the orders book to see the sales offers of other users. If we do not find the desired price, we can make a purchase request (bids) in which we can specify the purchase price of the desired cryptocurrency and the quantity.
On the other hand, if we already have cryptocurrencies and we want to sell them, we must establish a sell order in the orders book. We must establish the amount we want to sell and the price at which we want to sell.
It is not necessary to have cryptocurrencies, most exchanges allow to load funds in fiat by credit or debit cards, bank transfer and in some cases by PayPal.
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