Investment goals are usually focused on earning profit and expanding business opportunities. But it can be a learning process, too. The knowledge and experience of traders would serve as their guide in making more calculated decisions. It minimizes the risks associated with transactions and ensures valuable returns. For this and more other reasons, it is crucial to understand those matters that are unclear for many traders and investors.
What’s the difference between exchange and blockchain? It’s just one of the many questions that need clarity. A better understanding of the subject can solve certain mysteries about bitcoin transactions. You’ll be able to discover how each one functions depending on your choices and goals. This article will make you see things in the proper context.
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Understanding Blockchain and Exchange
Blockchain is a decentralized and distributed ledger that records digital transactions. It helps businesses and individuals do away with the centralized third parties that require access to their personal information. With bitcoin, monetization of data without the user’s permission is prevented. In the case of cryptocurrency, government and private interference are disallowed. That is why it is called a decentralized system.
On the other hand, there are two types of exchange: centralized and decentralized. The first is considered traditional as it relies on central ownership of servers and codes to function. While the second does not have a trusted third-party service to hold client’s funds and make trades with other users. The transactions in the latter occur between participants through time-locked smart contracts. Modern blockchain platforms like Ethereum facilitate it. Nevertheless, blockchains are currently eyeing to decentralize traditional exchanges.
Here are the key differences between the two in terms of specific factors:
- Ownership of Funds
Traders in decentralized exchanges have control over their funds compared to those in centralized counterparts. The traditional or centralized exchange requires users to deposit into their wallets before any exchange can be made. Trust is crucial to keep the funds safe, but it has been challenging to maintain in the past and even resulted in the theft of millions of funds. The most recent case involved high-profile Japanese exchanges where $500 million were stolen.
Data breaches have been common in centralized exchanges over the last several years. The leading cause of the hacking incidents is gross incompetence. For instance, when the investor deposits funds in an exchange, there is no guarantee on the currency’s security. Likewise, when stricter government regulation is imposed, the value of funds can fluctuate. This does not usually happen in the case of decentralized exchanges because users have control over their funds. Thus, it appeals to many investors for specific reasons.
Centralized crypto exchanges are governed by the regulatory laws of the country where they operate. Because of this, users can be required to go through investigations by the state agencies on matters that fall within their jurisdiction. The case of decentralized exchanges is different. It does not have to deal with oversight bodies, and this guarantees anonymity on the part of users. They can make transactions with one another, and no regulation is necessary.
- Liquidity of Pools
When more people are willing to trade an asset at a particular time, pools have strong liquidity. There are some cryptocurrencies with lower volumes than the others on smaller exchanges. This problem worsens when users try to sell assets, but no parties are willing to buy them. The practical solution is sharing the trade orders from the pool of people across various exchanges. It will enable users to gain access to better trading value and have faster settlements.
- Advanced Features
Centralized exchanges have several advanced features compared with decentralized ones. Because of the better speed and user experience that it provides, margin traders prefer the traditional method. Advanced features are harder to implement in decentralized exchanges as it can be a very complex process, as in EtherDelta.
Regardless of your experience in the cryptocurrency industry, it would always be helpful to learn new trends and unfamiliar things. Updates and changes are usually implemented in the system to provide better service, and you might be missing some crucial points if you are not aware of them. Knowledge equals better opportunities on many occasions.
Both exchange trading and blockchain networks are part of the crypto industry. As an investor, you must acknowledge that this business venture entails some risks due to market volatility. Prices can change from time to time, and new protocols may be initiated that could affect your digital assets.