Crypto exchanges have revolutionized the world of digital assets over the past decade. They have allowed users to buy and trade crypto almost instantaneously from anywhere in the world, effectively allowing for the crypto world to expand to every corner of the globe. These exchanges allow users to use fiat currency to buy crypto, as well as trade one crypto for another, or withdraw them for cash. There are of course, downsides as well to using crypto exchanges, as there are various types of exchanges that carry with them both benefits and negatives for the crypto enthusiasts that use them. We are here to analyze just that and explain how crypto exchanges will continue to improve the way digital assets are traded as, at least for now, not many traditional investment firms offer crypto trading services.
The kinds of exchanges available to users
There are three main types of crypto exchanges: centralized, decentralized and hybrid. Centralized exchanges use third parties to help them carry out transactions, similarly to a brokerage system, while decentralized crypto exchanges – commonly called DEXs – operate without the use of any outside entity, but rather on a blockchain that records every single transaction on a public ledger that anyone can access for verification purposes.
Pros and cons of crypto exchanges
When it comes to centralized crypto exchanges, they have a myriad of negative traits that, for example, decentralized versions do not. Such traits include the fact that they’re forced to obey the KYC regulations of their country of operation, as well as having severe limits in terms of volume of users and not relying on smart contracts, making the whole process much less transparent than in decentralized versions.
DEXs, on the other hand, do not require KYC and remain operative 24/7, while centralized ones do not, similarly to stock exchanges. Their smart contract code is open for anyone to see, meaning that users can simply verify its algorithm rather than trusting a centralized business to be solvent, as a CoinDesk article pointed out. The most popular decentralized exchange is Uniswap, which operates entirely on the Ethereum blockchain.
Theoretically, DEXs are seen as safer to use than centralized ones, since there is no central entity to hack. But this trait, which is DEXs’ strongest, can also lead to their downfall. The lack of a central entity means that users are left to their own devices if they run into an issue, as there is no one to contact. In addition, if a platform goes down, users are unable to access or move any of their funds, as happened in the case of FTX’s bankruptcy in November last year.
Future of DEXs and their importance in the crypto ecosystem
However, notwithstanding their negative traits, crypto exchanges remain a central part of the functioning of the crypto economy, as valid alternatives are hard to come by, at least in this moment in time. In addition, following the debacle surrounding FTX’s collapse in late 2022, exchanges are now starting to take extra precautions to increase transparency and customer protection. Such measures consist, partly, in tackling insider trading in exchanges, which often happens in the same manner as in traditional stock markets, with Paolo Ardoino, CTO at Bitfinex, calling for exchanges to take this issue seriously in order to increase their own credibility. Ultimately, crypto exchanges are vehicles for users to trade crypto, and without them the whole crypto economy would come crashing down; therefore, it is imperative that these DEXs ensure that customers feel safe when using them, therefore guaranteeing that they will return and keep trading, growing the crypto economy to new levels.
