A lot of people have ask us questions about exchanges; where we trade crypto, what our favourite exchange (Binance) is and what the difference between centralised and decentralised exchanges is.
We look at exchanges from 2 perspectives; we trade cryptocurrencies on exchanges but we also work with exchanges and advise our clients on how to work with exchanges. In this article we’ll focus on the trading side of things.
We have 2 main exchanges we trade crypto on: Idex and Binance and sometimes trade (small caps) on Cryptopia and we trade bitcoin (with leverage) on Bitmex.
There are number of exciting exchange coming – we’re most exciting about Legolas (https://legolas.exchange/) that combines the coolest features of both centralised and decentralised exchanges.
Back to the subject…
The main purpose of a cryptocurrency exchanges is – what’s in a name – trade cryptocurrencies. When you want to buy cryptocurrencies 9 times out of 10 you can’t b buy them directly or straight from the sources. Normally you will first have to buy one of the major coins (Bitcoin, Litecoin or Ethereum) and trade those for the coins you want on 1 of the exchanges, and when selecting your exchange you can opt for either a centralised or a decentralised exchange.
Now what’s the difference between the two options?
The short answer is that a centralised exchange is owned by a company and typically has a CEO, numerous employees, in some cases they also have shareholders a board and a P&L. Decentralised exchanges, in most cases, are not run by anybody, there’s no company and no CEO and they are run off blockchain technology and are, again in most cases, controlled by the users.
The main difference for the end-user is that on a decentralised exchange you keep your private keys and thus full ownership of the tokens you are trading (with), on a centralised exchange you don’t. Which means that in a worst case scenario where the exchange goes bankrupt or the owners go awol you no longer have access to your tokens because you don’t own the private keys to your wallet. From an ownership perspective and from a ‘not being a target for hackers’ perspective decentralised exchanges are far more secure than centralised exchanges such as Binance or Bitmex. There’s also the argument of privacy and anonymity; on a centralised exchange you have to provide them with a lot of information including a copy of a passport and even a proof of address, where on a decentralised exchange you trade 100% anonymous.
We now have a lot of positive things about decentralised exchanges; so why do we still prefer to trade on Binance? The main reason is liquidity; decentralised exchanges have a lack of liquidity (numer of buyers and sellers) which sometimes make it hard to trade currencies and with low volume it’s harder to attract new buyers and sellers what effectively makes it a self-fulfilling prophecy. Whenever that changes though, and we see the number of users on for example IDEX growing quickly we’ll see a snowball effect and can quickly see trade and user volume grow exponentially.
The other downside is that most decentralised exchanges typically are much harder to use – you need to understand how to manage your private keys and fight your way through a user interface that isn’t exactly user friendly and not intuitive at all. We expect new exchanges like Legolas to fix this and become a true competitor to the big exchanges, but right now it’s still a massive downside to using decentralised exchanges.
The future
Nobody knows what the future looks like but we do know that both centralised and decentralised exchanges will grow exponentially in the next couple years because of the new money flowing into cryptocurrencies which makes it very interesting to also invest in these exchanges (Binance has their own token ‘BNB’, Legolas has their own token ‘LGO’ and even Idex has it’s own token you can trade on their exchange ‘Aura’).
