Exchanges

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First things first – we need to make a couple of important distinctions.

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Centralized Exchanges vs Decentralized Exchanges

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Crypto Only Exchanges vs Fiat to Crypto Exchanges

Centralized Exchanges

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A centralized exchange is one that you send your money to, and they hold your money for you.

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A couple of pros are that centralized exchanges tend to be easier to use and that trades happen very fast within the exchange.

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The downside is third party risk. You have to trust other people. If the exchange gets hacked, well…. you’re probably out that money. If the people who have access to your money decide one day to disappear, well…. you’re probably out that money.

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There’s another big con to the community and to you personally, the word is rehypothecation. This means that the exchange doesn’t hold all the money they say they do.

Let’s say 10,000 people each put 10 bitcoin on the exchange, so the exchange received 100,000 bitcoin. Rehypothecation means that the exchange sells say 20,000 bitcoin. Now if you ask for your bitcoin back they probably won’t give you the same bitcoin you put in, they’ll just give you 10 out of the 80,000 they still hold. This can get pretty crazy pretty fast. It can appear that there’s a billion dollars worth of crypto on an exchange when in reality the third party only has 100 million dollars worth of crypto. This is bad for the community because price signals get all confused (it has some pros too, but in my view the cons outweigh the pros) and bad for you because now if users ask for 15% of their cryptos back, the exchange doesn’t have it. Maybe they left themselves enough room to go in the market, buy more, and stay afloat – or maybe they sink, in which case well…. you’re probably out that money.

Decentralized Exchanges

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A decentralized exchange is one on which you trade peer to peer. You’re in control of your money the whole time and you don’t have to trust other humans.

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A couple of cons are that decentralized exchanges tend to be harder to use and that trades happen slower. These are problems that the community is working very hard to mitigate though. In my estimation decentralized exchanges are the way of the future.

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It’s an honesty thing, a trust thing. Imagine a world where you could do business with anyone, no matter how sleazy they may or may not be, and still be assured they will do exactly what they said they would. That’s what using a decentralized exchange is like.

Crypto Only Exchanges

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The name pretty much says it all. You can’t buy cryptos with fiat here and you can’t sell cryptos for fiat here. All you can do is trade between cryptos.

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These exchanges have a much smaller set of regulations to deal with than their fiat counterparts. This is because governments have tons of rules around their fiat currencies. To sign up for crypto only exchanges you often only need an email address. (And cryptos of course 😀 )

Fiat to Crypto Exchanges

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These are a whole other ball of wax, for right now at least. In most countries you will have to give up your bank account information, government issued ID, blah blah blah.

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This is largely because the fiat to crypto exchanges that exist right now are centralized. A decentralized fiat to crypto exchange is a hard problem to solve but believe you me that plenty of people are working real hard on at least going that direction!

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In my estimation, this is the biggest thing slowing down crypto adoption. Governments don’t want you leaving their system. They want you to use their currency and only their currency. So they spend a lot of money paying guards to keep you inside their system – the gatekeepers.

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Well we’re building all sorts of bridges from the old system to the new system and they (governments) will continue to have their resources stretched further and further until anyone will be able to move into the new system very easily. Until we’re free human beings. Until everyone is in a free, fair system where rules rule rather than greed, corruption, and guns ruling.

This page is far from done. We will add examples of all the different kinds of exchanges, links to them, pros and cons, and our favorites.