You must have found a crypto user moving from a centralized cryptocurrency exchange to a decentralized cryptocurrency exchange lately. Yet only a handful of these users understand what a crypto exchange is. Readers will learn what a crypto exchange is, the type of exchanges, the differences between centralized and decentralized crypto exchanges, and suggestions on the best exchanges to use in this article.
What You Must Know About Exchanges
An exchange is a cryptocurrency platform that allows users to convert one cryptocurrency, such as Bitcoin, to another, like Ethereum. The forces of demand and supply, coupled with the number of tokens released and available to users, determine the price at which a token is exchanged for another. There are two types of cryptocurrency exchanges: centralized cryptocurrency exchanges (CEXs) and decentralized cryptocurrency exchanges (DEXs).
Users post their requests to the order book to buy or sell on a centralized exchange, where their transactions get filled by the market maker or liquidity provider. Market makers make money from the difference between the asking and bidding prices.
These prices represent the minimum amount a seller is willing to let go of their crypto asset and the maximum amount a buyer is willing to pay to purchase the same crypto asset. The spread or difference between both prices is often lower for liquid cryptocurrencies like Bitcoin.
Similarly, decentralized exchanges (DEXs) do not use centralized order books. They instead derive the spread automatically from automated market makers (AMM) built with smart contracts that execute transactions on the exchange. There are exceptions to AMM models for DEXs, but decentralized order books on the blockchain are largely a failure since miners can front-run users and make unfair gains with on-chain information.
CEX vs. DEX—The Exchanges Users Need
Understanding the two types of crypto exchanges is important to broaden your understanding and learn why those who use centralized or decentralized exchanges do it. CEX is a centralized cryptocurrency exchange, while DEX is a decentralized cryptocurrency exchange. The abbreviation is popular in the cryptocurrency space; hence users will often find the acronym and complete words used interchangeably in the crypto media.
How CEXs and DEXs Are Different
CEXs are centralized because assets are stored on these exchanges under the custody of a centralized cryptocurrency exchange service provider. When signing up for centralized exchanges, users are often required to provide means of identification and other personal information for anti-money laundering (AML), and know-your-customer,(KYC) purposes. The third-party exchange provider also stores the exchange data on centralized servers.
Categories of Users on A Cryptocurrency Exchange
Traders
Traders are one of the important categories of people who use crypto exchanges. These traders usually have a more aggressive approach to investing and trading in the cryptocurrency markets and actively take advantage of the volatility of the markets to maximize their profits.
Traders typically engage in several transactions using crypto exchanges, including buying and selling cryptocurrency, day trading, scalping, margin trading, arbitrage, and more.
For example, a trader may buy a certain amount of Bitcoin when the price is low and then sell it for a higher price when the market moves up. This is known as day trading. Another example is scalping, a trading strategy where the trader takes advantage of small price movements to buy and sell quickly and make a small profit.
Also, margin trading involves borrowing funds from a crypto exchange to buy more cryptocurrency than the trader has available. This is risky, but it can be profitable if done correctly.
In short, traders use crypto exchanges to actively take advantage of the volatile cryptocurrency markets and maximize their profits.
Investors
Investors are key players in on cryptocurrency exchanges. As the demand for digital currencies and blockchain technology continues to grow, investors increasingly use cryptocurrency exchanges to diversify their portfolios and capitalize on potential gains.
Investors can use crypto exchanges to purchase, trade, and store digital assets and access a wide range of investment products and services. Many investors take advantage of fixed annual investment products such as stablecoin pools and NFT securities, which provide a steady stream of returns and are less risky than other investment options.
Crypto exchanges also offer the ability to stake digital assets, a form of earning passive income. Staking allows investors to lock up digital assets for a period to earn rewards.
Crypto loans are another popular option for investors. These loans allow investors to take a loan in one digital currency and use it to buy another while paying back the loan in the same currency. This can be a great way to leverage one’s investment portfolio and capitalize on potential gains.
Overall, crypto exchanges offer investors a wide range of investment products and services designed to help them capitalize on the potential gains of digital assets.
Fans
Crypto fans are a passionate group of people who have dedicated themselves to understanding and investing in cryptocurrency. They often possess a varying understanding of blockchain technology, the market, and the various projects currently taking shape in the industry. Crypto fans are also often the first adopters of new tokens, as they are eager to explore the potential of the technology and invest in projects they believe in.
Fans use crypto exchanges to buy tokens based on their passion for the project. Crypto exchanges allow them to purchase tokens directly without going through a lengthy process of acquiring a wallet and transferring funds. This makes it easier for crypto fans to get involved in the cryptocurrency market, as they can purchase the tokens they need without worrying about technical details.
Crypto fans are essential to an exchange’s user base, providing the needed volume of buy orders on specific tokens. They demonstrate their confidence in a project’s and its potential through their investments, even at an early stage. This, in turn, helps to bolster the project’s credibility and attract more investors. As such, crypto fans are an invaluable asset to the crypto market.
Speculators
Crypto exchanges are not just used by investors who are looking to hold assets long-term but also by speculators who seek to make quick gains. These speculators wait for bad press, celebrity hype, or influencer gains published in the media to buy tokens. They are looking to get in and out quickly and are interested in something other than the token’s underlying technology or long-term prospects.
The speculative nature of these traders is often a double-edged sword for the crypto market. While they can provide liquidity and drive up prices in the short-term, they can also lead to market volatility and price instability. They are also more prone to exit the market quickly when prices drop, further exacerbating the downward trend.
Therefore, although speculators can positively affect the market in the short-term, it is important to understand that these traders are only interested in quick gains and may not be in it for the long haul. As such, it is important to understand the risks of investing in crypto assets and to be aware of the potential for volatility and price instability.
Why DEXs Are The Best Cryptocurrency Exchange?
While centralized exchanges have obvious advantages, the same advantages put the users at risk. Imagine if the protector of users’ funds under the guise of a centralized exchange turns out to be the bad actor trying to steal user funds.
The effects of such events are devastating, and most of the brunts fall on innocent users who unknowingly trust the exchange with their assets. Centralization is more disadvantageous but partially unnecessary, considering users need to move their funds from fiat to crypto before using decentralized exchanges.
On the contrary, decentralized exchanges bring user funds as close as possible to the owners saving them from falling victim to the whims of a self-proclaimed messiah overseeing the daily affairs of exchange on their behalf. Decentralized exchanges also protect user privacy from hackers who often target centralized exchange servers to steal information for resale on the dark web. Some hackers also target funds in centralized exchanges’ hot wallets, exposing users to significant risks.
Benefits of Using DEXs Like Pandora
The best crypto exchange to use is a decentralized exchange for the following reasons:
- Decentralized exchanges support self-custody leaving the control of assets with the actual owners.
- They do not require complex anti-money laundering and KYC procedures.
- With decentralized exchanges, user privacy is protected against malicious hackers trying to steal personal information.
- No possibility of a central actor carting away user funds or converting funds to other uses outside custody on behalf of the users.
- All transactions are transparent and traceable on the blockchain, from old to latest transactions.
- Provides additional earning opportunities like yield farming and stable earning opportunities like NFT securities.
- Some exchanges reward users for staying consistent on the platform through well-defined user-level systems and EXP obtainable for certain transactions.
Everyone Needs A Cryptocurrency Exchange
All crypto users need cryptocurrency exchanges. Still, it is important to transact more with decentralized exchanges and store your crypto in a hardware wallet where possible. Centralized exchanges are great, but you must keep your funds as close as possible to you to protect yourself in the cryptocurrency space.
If you are considering investing in stablecoins, you can use stablecoin farms like those offered by Pandora to keep your asset from volatility. If you want to hedge against inflation, consider investing in NFT Securities. Investors with a high-risk appetite interested in yield farming from time to time can also yield farm to earn high yields in native DeFi tokens like PAN and PSR.
Conclusion
Exchanges are to crypto, which banks are in traditional finance. Investors, traders, and everyday users hoping to keep their funds rely on the services provided by an exchange. Even though all exchanges seem to serve the same purpose, decentralized exchanges are a step ahead because they give users complete control over their crypto.
That shouldn’t go without saying that there are some risks, such as smart contract attacks, which could affect a decentralized exchange. Using only trusted exchanges like Pandora on the BNB Chain with multiple smart contract audits is a great way to stay safe.
These materials are for general information purposes only. They are not investment advice, a recommendation, or solicitation to buy, sell, or hold any digital asset or engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the crypto asset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your crypto assets, and you should seek independent advice on your taxation position.
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