If you are just getting into the world of digital currencies or already have some track record as a crypto investor, you may be wondering why traders use centralized exchanges to buy and sell digital assets.
Custody transactions on centralized exchanges
First, let’s explain what a centralized exchange versus a decentralized exchange is in terms of digital assets.
Centralized digital currency exchange aggregates many market options and makes them available to the end user (the trader) through a custody account, where a middleman usually holds the assets, if only briefly, in order to convert them from one type of asset to another.
Centralized cryptocurrency exchanges also tend to have wider markets online. The platform invests in various combinations of markets, tools and resources in order to offer the trader added value.
“A centralized exchange creates broader access to digital currencies for everyone because it removes the barriers to understanding or working with blockchain technology.”
In contrast, a decentralized exchange for digital currencies would resemble something like a simple currency swap and would not involve custody by third parties. It could look like a simple swap of one type of blockchain smart contract for another, where instead of the central exchange checking the trade, the transaction is automatically checked by each party and their compliance with the transaction.
This is what experts mean when they speak of “consensus-based verification”. Take the analogy of a wedding – even if there was no record of the ceremony, the wedding would be confirmed by the crowd.
Here are 3 advantages of a centralized exchange of digital assets:
Width of trading opportunities available
Some people call these exchanges “market aggregators” – they tend to offer hundreds or thousands of trading pairs so that someone with a certain value of assets can convert it into a wide range of options – bitcoin and ethereum, various altcoins and other products, such as the Example derivatives.
Liquidity is how quickly and easily a digital currency can be converted into another currency in the stock exchange. High liquidity indicates that there are many buyers and sellers, which creates a stable marketplace with no price fluctuations.
Centralized exchanges usually have higher liquidity due to narrow “bid-ask spreads”. This small spread drives further volume, which further secures liquidity. High liquidity exchanges also reduce the possibility of market manipulation as fraudulent orders would be much more difficult to place.
Direct access to derivatives
The derivatives market for digital currencies is really picking up speed. They have all sorts of menus for bitcoin futures and bitcoin options that allow traders to wager their money on a certain future value. Again, these are usually not transactions that can be carried out on a decentralized platform.
Another way to think about centralized versus decentralized exchanges for crypto is that the decentralized exchange is really DIY – you could compare it to the open source movement in software – there is no centralized party doing all of the transactions on direct way controlled.
On the other hand, the decentralized exchange is quite limited in the services it offers. Developers and users who try to bypass provider licensing by using something open source quickly find that it involves a lot more overhead. There is no vendor support, and with vendor-licensed tools, customers enjoy and rely on that support. The same goes for the centralized exchange of digital assets. They offer investors a service extension that they themselves could not do or only with difficulty.
Find your optimal trading strategy
These are all considerations that should be taken into account when choosing a place to buy, sell, or trade in digital assets. It always makes sense to look at a particular exchange’s regulatory track record as federal and state agencies scrutinize the business models of various digital currency exchange platforms. With a better idea of centralized vs. decentralized exchange options, it’s easier to choose a place to convert one fiat or digital currency to another.
Factory Exchange is coming soon. Our new central exchange is a unique, fresh and intuitive trading environment that will help you buy and sell digital currencies faster. Factory is simple, fast and seamless digital asset trading experience is part of the factory ecosystem where anyone can transform, hold, trade and grow any asset they own in one accessible place.
– Daniel Skowronski, General Manager at Fabriik Exchange
Fabriik is a transformative financial services company built for the pace of tomorrow. Our vision is a world where everyone has full control over their finances in order to lead the life they aspire to – where the possibilities are limitless and not limited. Our mission is to refine the entire fabric of the global financial system for the 1.7 billion people who do not have access to it and the rest of us who are at its mercy.
We’re building a better future for finance so everyone can thrive by creating a safe, open, and fully transparent ecosystem based on cutting-edge technology where anyone can convert, hold, trade, and grow any asset they own. Everything in one accessible place where everything is digital and everything is possible.
Our journey has only just begun and the adoption of regulated digital financial services is our first step in this transformation.
Factory. Rethinking wealth.
Disclaimer: This is a paid post and should not be viewed as news / advice