Centralized exchanges: everything you must know about them
Centralized tech is the latest trend in the cryptocurrency market. And the data speaks for itself: lately, market capitalizations have skyrocketed, cryptocurrencies transaction volume has gone over the roof and the joining of individuals, corporations and governments is bigger than ever before, reaching a global scale of users. The CEXs, centralized exchanges, are the organizations responsible for coordinating crypto trading on a larger scale.
To do this, they use the same business model of traditional asset exchanges. To summarize, lead you into the trading world with a parachute on your back, making transactions a little safer. So, you can understand everything you must know about the centralized exchange phenomenon, all its benefits and downwards, continue reading the following article.
What are centralized exchanges in crypto?
Basically, exchanges are marketplaces. They can be very useful when several people are trying, simultaneously, to buy and sell the same type of crypto. In the crypto world, the biggest CEXs are:
They are the equivalent to the New York Stock Exchange and the London Metal Exchange in the traditional stock market.
These exchanges are responsible for ‘clearing’ trades in the market. They keep some kind of digital order books, with lists of purchases and sales that are still open, their volumes and prices. Exchanges also match sellers with possible buyers and spread the word on current market prices, everything based on the last price an asset was sold for.
In general, CEXs also offer complementary services, like a crypto asset custody, which requires that its user deposit their cryptos at the exchange before actually trading them.
Can a central bank fix an exchange rate?
Having a central bank fix an exchange rate provides more assertiveness for importers and exporters during trades.
A fixed exchange rate is an settlement that bonds a country’s official currency exchange rate to another nation´s currency, usually applied by the government or a central bank. Its main purpose is to maintain a currency’s value responsive to the economy.
Fixed rates also assist the government in keeping a low inflation rate, which keeps the interest rates downward, stimulating trades and investments in the long run.
In retrospect, major industrialized nations have had their exchange rate system floating, where the price on a forex, a foreign exchange market, sets their current price.
What are decentralized exchanges in crypto
Decentralized crypto exchanges, also called DEXs, are blockchain-based apps used to coordinate a large-scale trading of cryptocurrencies between several users at once. This process is entirely done by automated algorithms, instead of having a financial intermediary working between the buyers and sellers.
The algorithms used by DEXs are good examples of smart contracts, which are pieces of code written over a blockchain network, such as Ethereum, that trigger numerous commands when given certain orders.
The whole point behind decentralized exchanges is to remove the intermediate person that regulars a trade, allowing everyone to work directly with each other. Also, DEX does not offer any kind of custody of the users’ cryptos; instead, users can keep all of their assets safe in their own wallet.
The problem with impermanent loss
Impermanent loss is a very common term in the decentralized finance area, especially when talking about liquidity providing.
Impermanent loss happens when the price assigned to the liquidity pool switches when compared to the price it was initially deposited. Because liquidity suppliers pair two investments together to form a position, the impermanent loss tends to happen once the ratio of tokens in the liquidity pool loses its balance.
This loss, however, can not be seen until the tokens are restrained from the pool - that is where “impermanent” comes from.
Basically, liquidity suppliers can try and get return to compensate the loss if they are fast enough to pull their tokens out from the liquidity pool at the same price level they were invested. Unfortunately, in reality, it is difficult to meet this price, which can turn an impermanent loss into permanent.
Centralized exchanges x Decentralized exchanges: what to wait from them
By using CEX, new users can take their first steps into the crypto world by themselves, focusing mainly on trading, and leaving the other bureaucratic aspects of the exchange to the company in command.
DEX, on the other hand, offers more freedom and a potentially higher pay off for its users, also giving them more investment opportunities. This system, however, demands a more knowledgeable, experienced user. Choosing between one of them is completely open to the trader's choice and financial goals.
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