Crypto Exchanges | What Are They & Why Do We Need Them?
Before online banking made things easier, if you were going abroad on holiday you might have visited the bureau de change. Did you know that cryptocurrency sort of has an alternative?
Swapping pounds for euros before a long awaited summer holiday to the Balearic Islands is a simple concept to get your head around. Apply a similar logic to cryptocurrency, and you’re left with crypto exchanges!
Okay so, likening a crypto exchange to swapping currencies might be a bit of an oversimplification. These platforms serve to do much more than just swapping things. Before crypto exchanges, people could only get their hands on cryptocurrency by participating in the mining or validating of coins. Alternatively, they would have to organise transactions to get crypto off people. Lately, the process is a lot more accessible.
There are various crypto exchanges out there, just as there are various cryptocurrencies. Before you choose which one you want to use, you’ll want to know a few things. A big one is the fee (or fees) a platform charges. If you’re on a tighter budget, you might be more limited to which exchanges you use. Another important factor to consider is the level of security you feel comfortable with. Exchanges will have different protocols and protections in place, and it’s certainly worth getting familiar with these before executing any significant transactions on them.
Table of Contents
What Are Crypto Exchanges?
How Do Exchanges Work?
Traditional Exchanges
Centralised Exchanges
Decentralised Exchanges
Choosing Crypto Exchanges
Why Do We Need Crypto Exchanges?
What Are Crypto Exchanges?
We’ve given a very brief summary, but what exactly are crypto exchanges?
So, you want to purchase an exciting new music NFT. Lots of great marketplaces, like Fractis, will accept payment from a regular old credit card, but not all of them do. To really get involved in investing or trading on the blockchain, you’ll need some crypto (currency) in your wallet.
If you’re starting from scratch, you can head to an exchange to buy your desired amount of a cryptocurrency of your choice. Should you wish to swap one kind of cryptocurrency for another, you can also do this on crypto exchanges. When you decide to cash out, you can also exchange crypto for regular fiat money.
How Do Exchanges Work?
Anyone new to the crypto world will quickly see that there is an awful lot to learn. Blockchain technology involves elements of investment, economics, technology, and a bunch of other things. This can sound intimidating, but it’s not impossible to get at least a basic understanding of things. Let’s look at how crypto exchanges work.
Firstly, in order to play an active part on an exchange, you must register. In order to do that, you need to complete the Know-Your-Customer (KYC) process. This is a verification process that is part of Anti-Money Laundering (AML) regulations, which all financial organisations are required to follow. It’s essentially a verification process.
Once you’ve been authenticated, your account will be open, and you will be able to start trading!
Traditional Exchanges
There are several types of crypto exchanges. In order to understand the differences, it’s helpful to know how a traditional exchange works.
For the purposes of understanding the next two types of exchange, think of this one as the standard, plain, original flavoured. Traditional exchanges are basically what has been described already in this article. They let you buy, sell, and trade digital assets based on daily market prices.
Generally, traditional exchanges charge a fee for transactions. This will vary depending on which exchange you opt for.
It’s time to add in some flavour now. When it comes to traditional exchanges, there are two main types.
Centralised Exchanges (CEX)
If something is centralised, it means that one company or governing body runs the show. They make all the important decisions and know what goes on behind the scenes.
Centralised exchanges are third party platforms that act as an intermediary between buyers and sellers. Some popular CEXs include Binance, CoinBase, Gemini, and Crypto.com. These types of exchange make their money through transaction fees, taking a cut for themselves.
CEXs decide which currencies and assets they trade in. This means that there is a level of scrupulousness, which can provide reassurance to users. A certain level of quality control, if you will, that ensures less established or desirable currencies don’t clutter up the platform.
Decentralised Exchanges (DEX)
A lot of the spirit and values behind blockchain technology and web3 developments is the idea of decentralisation. If something is decentralised, it means that power isn’t in the hands of just one organisation or a select few people.
Decisions around a decentralised platform fall to all its participants and users. Alongside this, due to use of blockchains, transactions, changes, and activity are all visible. This creates a transparent space, simultaneously resulting in a trustless landscape. There’s no need to blindly rely on one governing body to act as they promised they would.
Since the majority of decentralised platforms are built on the blockchain, they incorporate smart contracts. As a result, these types of platforms are also permissionless. Transactions are executed automatically as soon as the outlined requirements and stipulations are met.
Decentralised crypto exchanges are usually open source and rely on peer-to-peer trading. Because there’s no middle man, DEXs require users to have more technical understanding and knowledge of the blockchain and cryptocurrencies. Examples of popular DEXs include UniSwap, PancakeSwap, and Kyber.
Choosing Crypto Exchanges
With so many options to choose from, it can be difficult to know which crypto exchange is right for you. Earlier, we briefly touched on some things you need to consider before making this decision. It’s time to dig a little deeper.
Fees
Just like Visa, there are fees whenever transactions are executed in crypto. Fees vary depending on the exchange you interact on. Lots of people may see higher fees as an instant turn-off, but it’s prudent to consider why the fees might be so high. Higher fees are an expense initially, but could pay off if they come along with greater security, better insurance, and sturdier protections.
Sometimes, fees could be a fixed rate. However, it’s more common to see fees as a percentage of your transaction. Fees can also vary based on a number of reasons. For example, they can change depending on the cryptocurrency involved in the transaction. The price volatility of a currency can also affect the transaction fee.
Security
Any time there’s money or finances involved, we want to know everything is safe. That’s why it’s very important to check out the security of an exchange before entrusting your currency of any kind to it.
Unlike regular banks or stock exchanges, crypto exchanges don’t have a central organisation holding currencies. Because of this, the protections aren’t quite the same as regular banking. Some of the top crypto exchanges, like CoinBase, put any USD held on the exchange into FDIC-insured bank accounts. This same insurance isn’t afforded to crypto balances.
That doesn’t mean your crypto would be totally without insurance. Some exchanges rely on insurance to protest its users from fraud or hacking. Other exchanges rely on their own security practices and measures to protect from such events.
Some helpful things to look up when checking out the security of an exchange is how much of their crypto they hold offline. Cold wallets (ones not connected to the internet) are much more difficult for hackers to access. Two-factor authentication, common among regular web apps, is another good thing to look out for.
Accessibility
Not all exchanges can be accessed from any location. If you’re in a certain part of the world, or if you travel about a lot, it’s vital to check the accessibility level of an exchange before getting involved. You can find out where in the world exchanges are available usually by looking directly on the website.
Coins
When we first started hearing about cryptocurrency, we would hear mostly about a couple of coins. Bitcoin was the first, and Ethereum is the second largest in the world. It’s unsurprising that since the crypto explosion, there are now thousands of cryptocurrencies to choose from. Some, of course, more stable and established than others.
The two currencies just mentioned can be found on most crypto exchanges. However, if you’re looking for something newer or more niche, you may have to do a bit of digging. It is recommended that, particularly if you’re new to crypto and investment, you stick to the more popular and stable coins.
Educational Help
Beginners will understandably be on the lookout for educational tools to help them learn more about crypto. Fortunately, there are some exchanges which offer such help. Some exchanges even encourage continuous learning by running learn to earn programmes.
The CoinBase Earn programme rewards users with a small portion of crypto in return for watching videos about different coins. Some exchanges have academies that let users take courses and read articles, improving their knowledge and ensuring they become savvy members of the exchange.
Why Do We Need Crypto Exchanges?
If you have a lot of one currency, or simply prefer one above others, you might wonder why you would bother exchanging it for a different one.
To go back to the bureau de change analogy, not everywhere might accept the crypto you already hold. Certain NFT marketplaces might only deal in a specific currency. For example, Fractis is built on the Solana blockchain. Whilst accepting payment for NFTs from credit cards, the cryptocurrency we deal in is Sol. Crypto exchanges open up opportunities for investors and traders, and allow them to get involved in more projects across the web3 space.
Another great benefit of crypto exchanges is that they offer support should something go wrong. If you were to be the victim of fraud or hacking, or you forgot a password, there are people on hand to help you.
If you’re keen to get involved in crypto and love music, sign up to Fractis now and join the royalties revolution!