What is a crypto exchange? Ever wondered how it works?

The number of cryptocurrency exchanges in India has significantly increased as a result of cryptocurrencies’ growing popularity. But at the same time, it has witnessed a roller-coaster ride in recent times. But what is a crypto exchange? Have you thought about it? Is it a bank? How does it function? Let’s understand this in detail.

What is a crypto exchange?

You cannot simply purchase cryptocurrency from your bank or investment firm. After making the decision to purchase Bitcoin, Ethereum, or another cryptocurrency, you must register for an account on a crypto trading site in order to convert your Rupees or any other fiat currency into digital assets.

So, you can purchase and sell cryptocurrencies on a platform called a crypto exchange. You can buy cryptocurrency using fiat money, such as the US dollar, or trade one cryptocurrency for another on exchanges, such as converting Bitcoin to Litecoin. The prices of the cryptocurrencies that are available on exchanges are updated daily.

In India, there are over 10 major cryptocurrencies. According to different estimations, there are over 10 million crypto users in India.

How does a crypto exchange work?

A cryptocurrency exchange is a marketplace where users can buy and sell cryptocurrencies and convert them into fiat currency. The use of a live order book is the main method for accomplishing this. The exchange rate of each cryptocurrency is directly affected by the order book’s live buy and sell orders, which are displayed. An exchange with more users is likely to offer more prices that are relevant to the market because each exchange determines the price based on its own trading volume. This explains why there are frequently small differences in the pricing of Bitcoins on various exchanges.

Buying cryptocurrency

If you have made up your mind to buy cryptocurrency, then select any crypto exchange, and then you have to register on that platform and follow KYC ( Know Your Customer). A wallet will be created in which you will have to transfer your fiat money. With that money, you can buy listed cryptocurrencies and start trading. Notably, several crypto exchanges have advised that at the time of selecting an exchange, you must be careful and check exchange details. After you have executed the transaction, the crypto is then transferred to your digital wallet. You can even sell that crypto on exchange for another crypto.

How do crypto exchanges make money?

The most common way for centralised exchanges to make money is by adding commission fees to their platform. A predetermined commission fee, which may be as little as 0.1 percent, may be applied to each trade made on the exchange. Due to heightened competition, new exchanges encounter low liquidity in times of market consolidation and choose to impose listing fees on coins that they wish to list on their exchange. This also serves as a different source of income for exchanges in addition to facilitating Initial Exchange Offerings (IEO’s). Finally, in an effort to promote a native ecosystem, well-known exchanges choose to issue native exchange tokens and reward holders on their exchanges with fee reductions.

Decentralised VS Centralised exchange

Centralised cryptocurrency exchanges serve as a middleman between buyers and sellers, as the name suggests. The majority of cryptocurrency transactions are carried out through centralised exchanges, which offer more reliability. Some examples of centralised crypto exchanges are Bitfinex, Coinbase, Gemini and Kraken.

However, a decentralized exchange, in contrast to centralised exchange, is non-centraliszed and involves several parties managing the assets. Smart contracts and decentralised apps are used to automate transactions and trades as opposed to conventional centralised exchanges.

This approach is much safer since, as long as the smart contract is made properly, there can be no security breach. Some of the examples of decentralised exchanges are Uniswap, Sushiswap, Curve and Venus.

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