Steemit Crypto Academy S5 -Centralized Exchange and Decentralized Exchange - Homework Post for Task 7
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Explain in your own words what an Exchange is. Differences between Wallet and Exchange. Mention the advantages and disadvantages of DEX and CEX. Have you used an Exchange before? Tell us about your experience.
01. What is an exchange
This word denotes an action. So an exchange involves the action of giving something to receive something else in return that is equivalent to the value of what was delivered. In exchanges, both parties agree to receive the proceeds of said action. For example, someone may agree to hand over a phone and receive a bicycle whose value is equivalent to that of the handset delivered. It also applies in the case of the provision of a service, where the other party does not have liquidity but does have an asset whose value is equivalent to the work performed and both agree to carry out said action.
In the case of cryptocurrencies, the exchange refers to taking fiat money (FIAT) and delivering it to receive a cryptocurrency whose value is equivalent in the market to the FIAT money that has been exchanged. Also the exchange can happen in reverse: I give my cryptocurrencies for an amount of FIAT money with which I agree or exchange them for other cryptocurrencies. Up to this point we refer to the action between two people or group of people, but exchanges can go further. I am referring to the use of platforms that provide financial services, which can be centralized or decentralized.
02. Differences between Wallet and Exchange
In order to establish the differences we must understand what each thing refers to. For its part, the Exchange is the platform that makes possible the exchanges between the interested parties and the Wallet (software), is a digital container where we will keep our crypto assets, For this reason, the phrase digital wallet is used. It is like the link between our assets and the Exchange platform. They also exist in physical form, known as Ledger Wallet. Now let's see the differences.
| EXCHANGE | WALLET |
|---|---|
| Allows the purchase and sale of crypto assets | It serves to store our digital assets and have control over them, therefore it is a storage place |
| It is a platform that protects our assets online and allows us to decide what to do with them (for example, transfer them to another user or make exchanges) | It does not lose functionality if you do not have an internet connection, the cryptocurrencies will still be there |
| We can reset the access password and the money remains safe | If we lose access to the wallet there is no possibility of recovering the assets stored in it |
| Manage the funds that are in our name. For example, if I have $ 1000 deposited in the Exchange, it controls those resources. | Nobody has authorization on our crypto assets, therefore, only we have access to them. |
| Requires internet connection to allow exchanges | We can create a Cold Wallet for greater security (a fairly secure process because a public and private key is created offline) |
03. Mention the advantages and disadvantages of DEX and CEX
- Decentralized exchange platform (DEX)
Advantages:
It does not require personal data from its users and its operation is public, which makes it transparent.
They can maintain sufficient liquidity in the market at all times.
The user is the owner of the private key, therefore he has full control of his assets.
Smart contracts eliminate the need to trust someone to make exchanges
Disadvantages
By having to use other blockchains such as Ethereum, waiting times affect its speed of operation.
It does not allow to buy crypto assets with Fiat money, the only option is to exchange crypto assets on the network.
Oriented to advanced users, therefore, if we do not know how it works, it is difficult for us to operate in them.
- Centralized Exchange Platform (CEX)
Advantages
If we lose the key, we can recover it again with methods available on the platform or using technical support and we will have access to the funds again.
All participating users must go through the KYC process (user verification)
High security
Different cryptocurrencies can be exchanged, even bought with Fiat money
Disadvantages
The funds are in a central point and that makes it a target of hacker attacks. There have already been attacks that have drained many wallets leaving users without their funds.
Loss of privacy by having to provide personal data (this includes ID or passport)
The custody of coins is in the hands of a third party, so in the event of a hack, we could lose our funds if the platform is not responsive. (Example: In 2019 Binance suffered an attack with a loss of 7,000BTC. Thanks to its "deposit guarantee funds", the funds were replenished to the owners.
04. Have you used an Exchange before? Tell us about your experience
Yes, I have used Binance which is a centralized platform (CEX). Upon registration I had to provide my ID, do a face scan and submit documents for KYC verification. By being verified we access many functions. I have exchanged tokens such as TRX and Steem to the cryptocurrency of the BNB network. I have had no problems sending cryptocurrencies to and from Binance.
With the rise of NFT games, it has become necessary to have tokens like BNB to send to Metamask and exchange them for the game token. I have been able to carry out those exchanges without any inconvenience ... well, thinking about it if there has been one: a time when the Binance Smart Chain was so collapsed that it did not allow to send to another wallet an amount less than 0.050 BNB and it did not have that amount, so I solved it by sending TRX from Binance to Metamask and then doing the exchange from the wallet.
Very nice post
Thank you