How Does A Cryptocurrency Exchange Work?

Now long ago, the thought of buying and selling invisible currency on something called as Cryptocurrency Exchange would have struck people as a fanciful idea. In fact, conceiving the very idea would have been a rarity. But thanks to Satoshi Nakamoto, the anonymous inventor of Bitcoin, we got to see what the idea will look like in reality. Ever since it first came to the scene, Cryptocurrency and its fortunes have soared, breaking records and astounding people all around the world. Now everybody from investors, tech enthusiasts to the ordinary man wants to jump on the Crypto bandwagon. As a result, besides Bitcoin, scores of other Crypto coins have made their appearance. Litecoin, Theorem, Dash, Cash, and Ripples are some of the examples. Cryptocurrency’s exploding success has turned a lot of people into self-made millionaires. The popular notion is that if you’re good at predicting, you’re worth trying your luck in Cryptocurrency. There’s no shortage of people speculating a huge amount of money on different types of cryptocurrencies. Much similar to a Stock Exchange, people buy crypto coins of their liking on a Cryptocurrency Exchange.

What’s a Cryptocurrency Exchange & How Does It Work?

Cryptocurrency Exchange was created soon after the development of Bitcoin and other notable cryptocurrencies. It’s common knowledge that financial exchanges are strictly legislated with a whole host of conditions to be met by all the participating members. Credit to the advance in technology, cryptocurrency exchange works on a software.

There are two types of Crypto Exchanges where the asset exchange is possible in lots of different ways:

A Decentralized Crypto Exchange(Pre-Programmed)

Without buyers and seller, neither digital currency nor traditional exchanges would be possible. So in that sense, the two are quite similar. However, the absence of a brokerage intermediate and the complete decentralization is what makes Cryptocurrency exchange different from its counterpart. Decentralized exchanges make it possible for buyers and sellers to directly trade with each other without the involvement of any third party intermediary. This ensures that all trades are processed in a correct manner. Mostly such exchanges operate solely with the exchange of just cryptocurrency.

Intermediary(Cryptocurrency Company) – Fiat Exchange

There are various Cryptocurrency exchanges that work as an intermediary between buyers and the sellers to collect fee and make profits. Such exchanges operate as a fiat exchange wherein physical currency can be exchanged for cryptocurrency. Both types of exchanges have their advantages and disadvantages.

Where Did It All Begin? The Development Of Cryptocurrency Exchange

Where Did It All Begin? The Development Of Cryptocurrency Exchange

The transaction fees are still frowned upon in exchanges of any type be it Crypto or traditional. The fee is a significant portion of your profits over a period of time. If you’re someone who’s buying and selling on a pretty consistent basis, the transaction fee charged each time you trade is something that’s going to annoy you the most. That’s the chief reason for a shift towards the decentralized crypto exchanges as they totally eliminate the fee. The soaring success of Bitcoin has inspired many other people to start making their own crypto exchange as a means to make profits from a vast amount of trading that takes place there on daily basis. No wonder the demand for a top cryptocurrency exchange development company is on the rise. 

But that’s not to say everything’s rosy in the world of these exchanges. In February 2014, one of the largest Cryptocurrency exchange in Japan was shut down and later went on to file for bankruptcy. This happened because of a grand theft of Bitcoins from an intermediary that had been keeping record of all the transactions of various buyers and sellers. In effect, these buyers and sellers now became the exchange’s creditors. Many state-owned regulators such as SEC in US have started regulating these exchanges to ensure a repeat of such events doesn’t happen again. 

How Does One Buy & Sell On a Crypto Exchange?

We mentioned earlier that all the transactions take place on a software designed to handle digital currency trading. The Cryptocurrency exchange works by designing an order for people wanting to sell crypto coins. The orders carry information such as the quantity and price at which seller would like to sell the coin. All such orders are stored in a large ledger, often called an order book. Then on the other end, you have the buyers. Buyers would browse through the order book, checking out prices of various listed crypto coins in an attempt to find the find that suits their needs. In case, they have no success in finding a good enough order, they can go ahead and create their own order. After submitting the terms, the exchange tires to match the order conditions with the order conditions of the seller and that way an exchange is completed.

The most worrying thing about this whole process is the time lag that goes into completing an exchange. It can span from anywhere between a couple minutes to several days. However, there are ways to speed up this process. One way is to employ an intermediary. The other is making the software match the buyers and sellers physically as opposed to their specific terms. The former option makes absolute sense when one considers the possibility of disputes. A third party can always act as an arbitrator. 

Final Thoughts

With absolutely no concentration of power, low to no processing fees, the lack of government’s interference and most importantly, the decentralize exchange which offers more privacy are obviously a deal-breaking feature of Cryptocurrency exchange. For now, the path looks set for Crypto to dominate the centre-stage.

October 8, 2018



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