Despite the fact that cryptocurrencies have already become an integral part of the global financial system, their truly massive implementation in everyday life is not an instant process. At the same time, to maintain the relevance and value of digital assets, liquidity is needed, which is difficult to achieve in conditions of limited coverage. That is why one of the most important components of the cryptocurrency industry today is digital exchanges.
What is a stock exchange?
If we take the dictionary definition, the exchange is “a legal entity that ensures the regular functioning of the organized market for exchange goods, currencies, securities, and derivative financial instruments”. Trading is carried out through standard contracts or parties (lots), the size of which is regulated by the regulatory documents of the exchange.
Prior to the widespread dissemination of information technology, the exchange meant a specific place or building, where traders, intermediaries, and stockbrokers gathered at certain hours to conclude transactions with securities or goods. Of course, today most of the trades are already held electronically remotely.
The general principle of the operation of exchanges is quite simple: brokers (traders) place applications (orders) in the trading systems for the purchase or sale of certain assets. These applications are satisfied by counter orders of other merchants, and the exchange, in this case, acts as an intermediary and keeps track of executed transactions, as well as implements, organizes and guarantees settlements (clearing) and provides a “delivery versus payment” mechanism.
In most cases, the main source of income for exchanges is commission fees in the form of a certain percentage of each transaction made on the site.
In general, cryptocurrency exchanges (or digital asset exchanges) offer almost the same services as “traditional” ones. The main difference lies directly in the subject of trade – as the name implies, cryptocurrencies are the main trading asset on such digital platforms. Some digital asset exchanges offer exclusively cryptocurrency trading pairs, others support fiat currencies.
Cryptocurrency exchanges can be divided into two subspecies – centralized and decentralized. In the first case, the sites are controlled and managed by a third party, which acts as an intermediary in transactions. Such exchanges are closest to their traditional counterparts. Typically, centralized platforms require much more personal information during registration (especially if they support fiat trading and comply with regulatory requirements).
In addition, in the case of centralized crypto exchanges, users are forced to voluntarily transfer their assets to the storage site, which is associated with a number of risks. The most obvious is that such companies are still in the gray zone from the point of view of regulation in many countries of the world, and therefore traders are practically not protected by law.
Therefore, purely theoretically, the owners of any cryptocurrency exchange, even the largest, at any moment can simply “go into the sunset”, taking with them all the funds of traders stored on the platform. This is a rather extreme example, but it clearly demonstrates that one of the most important resources in the world of cryptocurrencies today is trust and reputation, which is somewhat contrary to the original goals embodied in the technology of digital assets.
Another vulnerability of centralized crypto exchanges is hacker attacks. Ordinary users (if they are, of course, not world-class millionaires) are unlikely to personally attract the attention of certain groups of attackers. At the same time, on centralized trading floors, huge numbers of user crypto assets are collected in one place, which makes such exchanges very attractive for hackers.
On the other hand, today the vast majority of trading floors operating on the cryptocurrency market are centralized. The presence of a single platform, as well as a team of developers and managers, allows us to achieve maximum convenience for users in matters of interface, performance, efficiency, ease of registration, technical support, etc.
What are decentralized crypto exchanges (DEX)?
Decentralized cryptocurrency exchanges lack many of the above disadvantages, however, they are much less represented on the market. In addition, already in the second half of 2018, DEX’s trade turnover began to decline markedly, which created serious problems for maintaining liquidity.
In many ways, the unpopularity of DEX is associated with a high entry threshold for users. Often, such exchanges cannot boast of a transparent and understandable interface, and by default, traders are required to have sufficiently advanced technical skills.
Even the basic principles of DEX are a two-edged sword. On the one hand, operations on them do not require constant monitoring by third parties, as well as a single central base – all operations are programmed through smart contracts and ideally do not require further intervention. In addition, in the case of DEX, users do not need to deposit their assets with third parties.
On the other hand, if errors are found in DEX smart contracts, it will be impossible to correct them after activation – this is due to the blockchain structure itself, in which changing data in hindsight is practically impossible without serious interference with the entire network.
What to look for when choosing an exchange?
Since there are dozens or even hundreds of cryptocurrency exchanges on the market today, starting with industry giants like Bittrex and Binance and ending with miniature regional platforms, choosing a platform for the end-user is becoming increasingly difficult. Therefore, it is always recommended that beginners and even experienced traders carefully study all the information available about one or another site. First of all, pay attention to the following indicators.
As mentioned above, reputation is one of the most important indicators of a cryptocurrency exchange, especially when it comes to centralized sites. Before you entrust your assets to a third party, it is worth examining as many reviews about the site as possible, not only on large sites (they can be affiliated) but also for ordinary users. If you want to ask questions of interest, you can even personally – for example, on forums like BitcoinTalk and Reddit.
Most cryptocurrency exchanges openly publish information about their commission policies on the official website. Before you begin, be sure to clearly understand all its aspects. First of all, it is worth paying attention to the size of fees for deposits, transactions, and withdrawals.
Means of payment
It is always important to clarify in advance which payment methods are available on the selected crypto-exchange: credit and debit bank cards, online transfers, PayPal, Qiwi, etc. If the set of payment instruments is limited (or the proposed options involve tangible fees), then it’s reasonable to look at other sites.
For example, when buying cryptocurrencies with a credit card, most often you will need to pass an identity check, and the proposed exchange rates will often be higher. At the same time, the purchase of digital assets through online payments can take much more time required for processing the transfer by banks.
Many cryptocurrency exchanges may require confirmation of the user’s identity. At the same time, there are intermediate options – for example, at many sites in Russia and other countries it is possible to register anonymously, but in this case, the list of available financial instruments will be limited. In this way, cryptocurrency exchanges protect themselves from all kinds of fraud and counteract illegal money laundering.
Even if the exchange offers its services in your country, some specific functions may still be available only to residents of certain regions. Before registering on the exchange, it is recommended to check whether you can use all the existing functions of the site.
In the world of cryptocurrencies (however, as in the financial industry as a whole), there are no single exchange rates for this or that asset, so the prices on digital platforms can vary significantly.