The year 2009 proved to be a great revolution for the digital world. Satoshi Nakamoto, a man, or a group, worked hard and wrote a code for the world’s first cryptocurrency. Whether Satoshi knew at the time of building the code or not, the first crypto has been in the headlines ever since its birth. Nakamoto has kept his identity a secret since the very start.
After the origin of Bitcoin, the first currency, many digital currencies surfaced. With these many currencies, the need to have a trading platform rises. Exchanges can either be centralized or decentralized, both differing in the hierarchies of operation and governance.
In the digital era, an online platform like a crypto exchange is the most convenient way to trade in crypto- fiat and crypto-crypto pairings.
Centralized Exchanges — How do these Crypto Exchanges Work?
Centralized exchanges are run by a third-party or an organization, i.e. trusting someone else to handle your money. The concept is the same as banks. As we trust banks to handle our money, the exchanges imitate the same ideology. The term centralized refers to a middleman taking care of the assets being traded. In simpler terms, people think this is safer than handling all their money themselves. It is true in many regards since these organizations consist of trained professionals equipped to handle large amounts of money. Other services like loans and savings also make people go for centralized architecture.
You can store money on the exchange, log in with security features such as two-factor authentication. These and other various features make crypto exchanges popular. All exchanges do not provide fiat to crypto pairings, buts some popular ones do. Some of these include Gemini, Coinbase, Robinhood and Kraken.
The need for a Decentralized Exchange
One of the main motives behind cryptocurrencies was to create a source to eliminate the third party. If this the main aim, why not use decentralized exchanges? Exchanges that are built on the exact principle that the cryptocurrencies stand for- no middlemen, and put trust back into the system. Rather than trusting a company to keep your funds safe, you do it for yourself. All of your money remains in your hands, for as long as you want it to. Trading and other transactions are all done by you and you only, making decentralized exchanges perhaps the most personal experiences in cryptocurrency trading out there.
How do these Decentralized Digital Currency Exchanges work?
Relayers: Relayers are responsible for broadcasting orders through public or private order books. They bring liquidity to the network by hosting its order books, acting effectively as an exchange. But unlike an exchange, it cannot execute any Trade but rather broadcast a maker order on the network,
Maker: The Maker is an address which originated the buy/sell order and using the help of relayer instead of pushing the order on the chain which charges a gas price it lists the Order on the network for a suitable Taker to make a request.
Taker: A Taker is an address which has been permitted to fill an order that a Maker has listed. For a trade to be executed the Taker has to submit the Maker’s signature along with his own signature to the DEX’s smart contract.
If you have done your research, you will realize crypto exchanges work similarly to regular stock exchanges. Looking at the difference, you will see that on a stock exchange, traders buy and sell assets — shares or derivatives — in order to profit from their changing rates, while on crypto exchanges, traders use cryptocurrency pairs to profit from the highly volatile currency rates.
If you think you are ready to trade, create an account on a crypto exchange. You will be required to transfer an initial amount of money into the account. It’s very common that crypto exchanges don’t accept USD or other fiat money as the domestic currency i.e., the currency you put into the account in the first place.
In order to start the process, you should buy some crypto on the cryptocurrency exchange or in your crypto wallet app. Transfer them to the address that the crypto exchange provides you. Although, once you become familiar with the market, you may also find some platforms that accept USD as well as PayPal and credit cards.
If you don’t have enough money to trade, you may borrow it from the crypto exchange. This is called margin trading. In this case, it’s important to remember that there may be a leverage factor, which could either increase your profits or your losses.
