Blockchain is a technology with decentralization, anonymity, and immutability. In recent years, it has been widely used in various fields, such as digital cryptocurrency, financial services, and risk management. One of the applications that has attracted much attention is cryptocurrency.
Like traditional finance, cryptocurrencies have exchanges that provide users with services to buy, sell, and trade cryptocurrencies. Exchanges can be categorized into centralized and decentralized exchanges. At present, centralized exchanges play a dominant role in the cryptocurrency market.
Some of the Things People do not Say About Exchanges
In the newly initiated crypto space, you may believe that when you use a centralized exchange (CEX), the crypto you buy will be stored nicely and cozy in a separate wallet on the exchange.
For instance, When you buy crypto on an exchange, whether it's $BTC or one of the 1000s of altcoins, your balance is more like an IOU from the exchange. They will send it from their central reserve to your chosen wallet if you want to withdraw it. This can be good, bad, and downright ugly.
The Good
If crypto is sent from one wallet to another every time a client exchanges, this will result in very high fees to pay for the on-chain transaction costs. On a CEX, you will not pay gas fees to exchange tokens.
A CEX usually does on-chain transactions upon depositing and withdrawing crypto. Trading is off-chain; the exchange takes care of it against reserves. Ergo CEXs have meager trading fees (great, each loves cheap fees).
The Bad
Crypto is big business, and so those savvy folks at CEXs were quick to note the fact that clients do not withdraw their crypto all that often. As a result, exchanges can sell more crypto than they have in their wallets as long as the exchange has enough crypto at its disposal to allow their clients, who want to withdraw, to do so. Then all is good (at least to the unscrupulous exchange). The exchanges are coining it in.
Additionally, exchanges are naked shorting.
Naked short selling is naughty short-selling of assets that have neither been borrowed nor located. In simple terms, an exchange themselves may decide to go on their books and sell coins they do not have.
Furthermore, increased activity or coordinated attacks can impact the downtime of CEX platforms, which can cost traders valuable opportunities. Centralized exchanges are more susceptible to government regulations and censorship. Thus, regulators may be able to seize the funds held by the exchange platforms and reveal customer data.
Centralized exchanges remain the most widely used method of crypto exchange. It is one of the fastest and most cost-efficient methods of processing financial operations. Day traders and crypto investors prefer CEXs for their convenience.
CEX platforms have received backlash for their lack of transparency, as the users do not have access to internal operations. This allows for malicious exchange practices, price manipulation, and, in some cases, money laundering.
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