The backbone of the crypto economy is crypto exchanges. These are the services and platforms that allow people worldwide to buy, trade, and hold cryptocurrencies from all the different projects out there. The extent and importance of these platforms are such that in 2018 Binance reported higher profits than Deutsche Bank.
This should not come as a surprise to those with enough knowledge about cryptocurrencies. Before DeFi, the ICO boom, the 2017 bull market, and the launch of Ethereum, exchanges were the very first profitable use case for crypto. Back when we only had first-generation blockchains, and there was no token economy, it was the exchange that boosted transaction throughput for the early coins.
As the world of Blockchain keeps evolving, so has the exchange grown with it. Many types of business models have taken hold, all serving different markets and dring crypto adoption. In this article, we will discuss the different types of exchanges, their different strengths, and weaknesses, and see why some types of exchanges are only possible on the Blockchain.
Cryptocurrency exchanges provide crucial opportunities for Nigerians looking to enter the crypto economy. Most exchanges are focused on the larger crypto markets of North America, Western Europe, and Asia. This means using Naira to buy crypto could be difficult without going to exchange for US dollars first.
As their name implies, these are exchanges that are run from a centralized location. This generally means server space using traditional data architecture. Most centralized exchanges operate as regular companies. This means they have a charter, are legally registered in a region, obey the local government’s laws, and have a corporate structure.
These types of corporations were the first exchanges to offer trading for cryptocurrencies. They have become an established part of the crypto world and have become very influential in their own right. Names such as Binance, Kraken, Coincentral, etc. are well known among the community.
Because of the custodial nature of centralized exchanges, users relinquish ownership of their coins and tokens to the exchange. This is done in the name of convenience, cost, and speed. The fact that the assets are stored in the exchange means these can quickly be sold not even by humans, but by crypto trading bots connected to the exchange.
Yet, with the ease of use comes the possibility to lose everything on a hack. Numerous are the different hacks that have afflicted centralized exchanges. Many users have lost millions in cryptocurrencies in such events, and people have lost trust in exchanges.
Additionally, these centralized exchanges mainly cater to the market of wealthy developed countries. They don’t have good support for people in developing countries such as Nigeria. There are some exchanges native to Nigeria and Africa, but they suffer from liquidity limitations because they have to compete with the wealthier exchanges from outside the continent.
Advantages of Centralized Exchanges in Nigeria:
Disadvantages of Centralized Exchanges in Nigeria:
- Singular point of failure
- Under regulation
- Difficult to use from Nigeria
- Little support for Naira
- High fees for small amounts of money
- Custodial power.
Peer-to-peer (P2P) Exchanges
These are platforms which match buyer and seller looking to trade. The business model of a peer-to-peer exchange is to offer an escrow service that securely can hold the funds of both parts until the transaction has been completed.
In this type of exchange, the assets are not held by the platform. All the participants have their wallets separately, and they only transfer the funds once a successful offer match has been found. This means fewer chances of hack events on the exchanges.
Additionally, the peer-to-peer model is highly resistant to censorship by a government. All the sellers and buyers in the platform are individual users around the world transacting on a platform. A person looking to buy crypto from a nation where this is heavenly regulated can easily find a seller from another country.
A popular example of a peer-to-peer exchange is Remitano. It offers a secure escrow service for not only cryptocurrencies but also fiat money. This means it can be used as a money on-ramp to purchase coins. It also has a web wallet for ease of use.
We can think of peer-to-peer exchanges as a middle ground between the two extremes of centralized and decentralized.
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Advantages of Peer-to-peer (P2P) Exchanges in Nigeria
- Non-custodial trading
- Censorship resistance
- Reasonable minimum balance
- A large pool of buyers/sellers
- Global reach
Disadvantages of Peer-to-peer (P2P) Exchanges in Nigeria
- Dependent on market participants
- Low offer of tokens and coins.
On the complete opposite side of the spectrum, we’ve Decentralized Exchanges (DEX). These are platforms that match buyers and sellers purely using the power of smart contracts. As a result, no one can stop trading happening in DEX. Also, in them, there is no need to go through Know you Customer (KYC) protocols because they are outside of this type of regulation.
The DEX runs entirely on top of the Blockchain. Of course, user interface and some algorithmic matchmaking stills run on servers, but the core of an exchange, the trading, is done using smart contracts. This is a new type of exchange that is only possible using Blockchain technology. They are a new type of beast previously never seen in history.
As a result, there is a lot of hype and fanfare behind decentralized exchanges. Many have called them the future of the economy and similarly hyperbolic comments. And though indeed, they are important innovations, they also have significant problems.
A DEX is a relatively unfriendly platform. Since they are running on-chain, they can be slow and unresponsive, which can be a nightmare for a professional trader. Also, and perhaps most importantly, a decentralized exchange can only host the cryptocurrency and tokens native to its host protocol. A DEX running on Ethereum can have Ether and tokens launched on the network, that is it.
Although there are workarounds such as Wrapped Coins, for instance, wrapped Bitcoin that technically bring BTC to Ethereum. But this is just Bitcoin hosted in a smart contract made into an ERC-20. It is not a viable solution for all the other coins and tokens that cannot be wrapped in Ethereum. This severely limits the types of assets traded in a DEX and the liquidity available for it.
Advantages of Decentralized Exchanges in Nigerians:
- No KYC necessary
- Complete censorship resistance
- Global reach
Disadvantages of Decentralized Exchanges in Nigerians:
- Poor user experience
- Low liquidity
- Limited pool of viable tokens and coins
Exchanges have been with crypto from the start. As the Blockchain evolves, so will the exchange, and both will witness innovative solutions. Yet, it will always be the case that crypto users will need exchanges for viable economic adoption.
What is the best choice for Nigerians?
Looking at the three different types of exchanges, the peer-to-peer business model is the best one for developing nations. It combines the advantages of the DEX with those of the Centralized Exchanges. Due to its peer-to-peer model, it is censorship-resistant and liquid, also has the customer support and intuitive interface that a DEX lacks. The P2P model also offers the ability to make small purchases of crypto at low fees, which is hard for other exchanges.
The best choice is Remitano since, in recent years, it has focused on developing the Nigerian crypto market. It has introduced a Naira wallet that can be used to trade BTC and other crypto instantly. It has a large, very active community of traders in the country and offers full customer support for those coming into the crypto economy. The time is now to enter the world of cryptocurrencies for all Nigerians looking to profit from trading.
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