check out this section</strong></a>!</p>\n<p>My point here, though, is that, with DEXs, this feature is not available. <em>Now, is that a good or a bad thing? Well, it depends!</em> While storing your cryptocurrencies on an exchange is super-convenient, it’s also a bit risky - what if the exchange gets hacked, and the hackers gain access to your assets?</p>\n<p>On the flip side, decentralized exchanges eliminate this issue, altogether. <strong>You are the only one responsible for what happens to your cryptos</strong> - even if the underlying exchange gets hacked, since you aren’t storing your cryptocurrencies on it, your funds would technically be safe. That being said, some people just want to avoid the hassle that comes with managing a wallet of your own, or want to have the chance to communicate with customer support, if something goes wrong - a feature that, once again, isn’t available with decentralized exchanges.</p>\n<p><strong>Traditional payment methods</strong> are another key point to mention, too. If you’re looking to *BUY* cryptocurrencies with euros, US dollars, or any other traditional currency, then centralized exchanges are kind of your only option. That’s because DEXs don’t have this feature - remember, they are anonymity-driven! There wouldn’t really be all that much anonymity if you’d end up revealing all of your bank details to the exchange, now would it?</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"DEX VS CEX: Traditional payment methods.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/cex_vs_dex_06.jpg/" alt=\"DEX VS CEX: Traditional payment methods.\" width=\"1000\" height=\"664\" /></p>\n<p>To add to all of that, comparing DEXs VS CEXs, you will also soon notice that the latter are a bit primitive, when compared to their centralized counterparts. While centralized exchanges aim to offer <strong>as many different features to their users as possible</strong> (just take a look at Binance, as an example), DEXs are really mostly focused on one, single thing - <strong>trading one crypto asset for another</strong>.</p>\n<p>Now, while it may seem like centralized exchanges are superior to DEXs in every single way, that really isn’t the case. Remember - with a centralized crypto exchange, you will have to reveal a lot of information about yourself, in addition to your bank details, residential address, and so on. <strong>There is no anonymity</strong> - something that’s still considered by many to be one of the core pillars of crypto and blockchain technology!</p>\n<p>Furthermore, <strong>CEXs are also usually very slow to add new coins & tokens</strong>, and some platforms even have a habit of freezing their users’ funds, or halting their trading functionality for any and all reasons they see fit. None of these are issues that you would come across with a decentralized exchange!</p>\n<h2>Final Thoughts</h2>\n<p>Wrapping things up, the conclusion is actually quite simple - <strong>both centralized and decentralized exchanges have their own, specific pros and cons</strong>, and are both also very specific in the benefits that they provide. Industry newcomers and casual traders prefer using CEXs, due to the simplicity and feature variety that these platforms offer. Crypto veterans and hardcore enthusiasts, on the other hand, love and appreciate DEXs - here, they can trade anonymously, and access all of the newly-launched crypto coins and tokens.</p>\n<p>Now that you understand the basics of what is a decentralized and what is a centralized crypto exchange, you should be able to distinguish your preference, as well!</p>","preview_url":"https://www.bitdegree.org/crypto/learn/dex-vs-cex","youtube_video":{"id":129,"channel_id":1,"sort":21,"video_title":"DEX vs CEX: Which is Best for YOU? (Explained with Animation)","description":"DEX vs CEX - which exchange is better to use?\n\nThe world of cryptocurrency exchanges is often a complicated one - this is especially true if you’re looking into some advanced exchange functionality. One of the bigger points of confusion for many people has to do with centralized and decentralized exchanges.\n\nIn this video, I will tell you about both of these types of crypto exchange platforms. You will learn what is a decentralized crypto exchange and what is a centralized crypto exchange, as well as the differences and similarities between them. Lastly, I will also tell you about the pros and cons of using both of these types of exchanges.\n\nHave you ever traded on centralized or decentralized exchanges? What are the main differences you’ve noticed? Share your thoughts in the comments below!\n\nVideo Time Table:\n\n0:00 Introduction to DEX vs CEX\n1:05 What is a DEX & a CEX?\n4:03 Which Exchange Should You Choose?\n8:00 Wrap-up: Decentralized Crypto Exchange vs Centralized Crypto Exchange\n\nMore Related Videos:\n\n🔑 How do Cryptocurrency Exchanges Work?\nhttps://www.youtube.com/watch?v=sRawseOB8TY\n🔑 Is Decentralized Anonymous Blockchain a Myth?\nhttps://www.youtube.com/watch?v=pLmw3W9IRiE\n🔑 What Does Staking Mean in Crypto?\nhttps://www.youtube.com/watch?v=irhlfrCrywo\n🔑 What is a DAO in Crypto?\nhttps://www.youtube.com/watch?v=toSViQmtqFQ\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps://twitter.com/crypto_xplained\n\n#DexvsCex #WhatisaDecentralizedCryptoExchange #WhatisaCentralizedCryptoExchange","video_id":"x01npBGKiv4","duration":529,"view_count":555,"thumbnail_url":"https://i.ytimg.com/vi/x01npBGKiv4/hq720.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-11-09 15:45:16","created_at":"2022-11-09T23:00:04.000000Z","updated_at":"2023-05-21T23:00:04.000000Z","channel":{"id":1,"title":"CryptoFinallyExplained","channel_id":"UCOryUY0yxC08eJtK23mNgiA","main_playlist_id":"UUOryUY0yxC08eJtK23mNgiA"}}},"prevSection":{"id":18,"featured_image_id":6631,"original_id":null,"youtube_video_id":19,"author_id":42,"translator_id":null,"chapter_id":2,"title":"The Practical Use of Crypto","slug":"practical-use-of-cryptocurrencies","definition":"Did you know that you can pay for a college degree or even a funeral using only cryptocurrencies?","status":"published","content":"<p>The whole concept of cryptocurrencies is getting more and more popular every day. A lot of countries are integrating crypto as a payment method for certain services. For example, you can even pay with crypto for some KFC chicken wings in Canada.</p>\n<p>However, can a country forget all traditional currencies and payment methods and function purely on cryptocurrencies? This scenario would definitely come in handy in a lot of different situations - for example, when a country is facing massive sanctions from other countries. If this was the case, maybe crypto could even help evade these sanctions?</p>\n<p>Let's take a <strong>real-world example</strong> <strong>of the biggest sanctions in history</strong> placed by the Western world on Russia during the military crisis in Ukraine to try to answer these questions. Keep in mind that these sanctions include the denial of a lot of financial tools, too - SWIFT, VISA, MasterCard, and so on.</p>\n<p>Also, I’d like to stress again that this situation could happen in any other country around the world - Russia, in this case, is just <strong>a real-world example.</strong> Keep in mind that it should only be viewed as <strong>a case study!</strong></p>\n<p><em>So, let’s get right to it.</em></p>\n<h2>Sanctions in Russia</h2>\n<p>So, you probably know the massive military crisis that happened in Ukraine which was forcibly initiated by Russia.</p>\n<p>Please note that the situation is extremely complex and horrible, so I won’t go into any political talks regarding it. Instead, let’s focus on the topic at hand.</p>\n<p>Due to the unjustifiable aggression, Western countries - the United States, the EU, and a few others -<strong> issued a lot of various sanctions against Russia</strong>. Many of these sanctions targeted specific, high-ranking Russian oligarchs - most, however, were aimed at Russia’s economy.</p>\n<p>In addition to these said sanctions, many Western companies also halted their business within the country, during the time of the crisis. So, let’s take a closer look at these sanctions and withdrawals.</p>\n<p>For starters, probably the biggest blow to the Russian economy was <strong>the partial denial of SWIFT within the country.</strong></p>\n<p>What is SWIFT? Officially, the term SWIFT is abbreviated as “The Society for Worldwide Interbank Financial Telecommunication”.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_2.o.jpg/" alt=\"The practical use of cryptocurrencies: SWIFT.\" width=\"1000\" height=\"463\" /></p>\n<p>So in short, <strong>SWIFT is a financial worldwide messaging service.</strong> It’s like a niche internet or even a social network, just between banking institutions. To be more specific, it’s a tool that banks worldwide use to communicate transactions between one another.</p>\n<p>SWIFT doesn’t deal with the transactions directly, but instead, it allows banks to communicate these transactions in the form of messages to one another, and <strong>it serves 32 million financial messages per day on average! </strong><em>So yeah - now you see, it's a really massive network.</em></p>\n<p>Allow me to illustrate SWIFT operations with an example, so that you could understand it even better.</p>\n<p>Let’s say, you have a friend named Tom, and want to send $10 to him, via a bank transfer. However, Tom uses a different banking platform.</p>\n<p>As you make the transaction, your bank messages Tom’s bank about it - it informs Tom’s bank that there’s a transaction incoming, from you to Tom and that it’s $10. All of this information is relayed via the SWIFT network.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_1.o.jpg/" alt=\"The practical use of cryptocurrencies: Sanctions in Russia.\" width=\"1000\" height=\"818\" /></p>\n<p>Without SWIFT, banks would need to rely on <strong>emails and poor encryption-possessing messages</strong> - as you can probably understand, this is far from ideal, since we’re talking about financial operations here.</p>\n<p>In order to understand the magnitude of the SWIFT ban in Russia, think of it this way - in 2020, there were a bit <strong>over 20 million messages per year</strong> sent on the Bank of Russia SPFS system (“System for Transfer of Financial Messages” - a Russian alternative to SWIFT). By comparison, during that same year, there were <strong>over 110 million messages</strong> sent in Russia via SWIFT and other non-Russian bank messaging services.</p>\n<p>However, as of March 7th, 2022, there were 7 Russian banks banned from using SWIFT. It was also stated that, if Russia continues its aggression against Ukraine, more banks would be included in the ban too.</p>\n<p>With all of that being said, what did all of this meant for Russia, in the first place?</p>\n<p>Well, to put it simply, <strong>Russian banks weren't able to communicate with banks located in other countries</strong> and were, thus, cut off from the rest of the world. Russians weren't able to send and receive money to and from foreigners, payments were frozen, and credits weren't possible to be issued. According to the announcement of the SWIFT ban, the Russian ruble crashed by 30%, in price.</p>\n<p>The next huge blow to the Russian economy was<strong> the announcements made by VISA, MasterCard, and American Express.</strong> All three companies seized their operations within the country - if you resided in Russia, and owned any of the three debit cards, you were not able to perform any transactions with them. Even international electronic payment methods like PayPal stopped supporting transactions in Russia.</p>\n<p>This was huge for obvious reasons. Take VISA, as the simplest example - it’s probably the most popular payment facilitator in the world, being supported on the vast majority of online marketplaces, and used by over 2 billion <em>(yes, you heard right - “billions”!)</em> people around the world.</p>\n<p>Naturally, there were MANY more finance-related sanctions imposed on Russia - these are just among the most notable ones. Summing all of that up, however, it’s safe to say that these sanctions and major financial company withdrawals from the country were crippling to the Russian economy.</p>\n<p><em>Now, then… Where does crypto come into all of this?</em></p>\n<h2>Cryptocurrencies as a Tool for Russia to Avoid Sanctions?</h2>\n<p>As financial sanctions continued to be imposed on Russia, many people began questioning whether the country could <strong>use cryptocurrencies to mitigate some of the effects of these sanctions.</strong> In order to understand how this could be possible, you first need to get familiar with the term “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-know-your-customer-kyc/">KYC”./nKYC stands for “<strong>Know Your Customer</strong>”. It’s a set of financial regulations that all banking and financial institutions around the world must comply with, to some extent. Essentially, these institutions must collect information about their customers (identify them), in order to identify and prevent any and all potential fraud, money laundering, and other types of defrauding activities.</p>\n<p>Traditional banking institutions comply with and enact some very strict KYC checks. This is because, by default, traditional banks are very strictly regulated. With cryptocurrencies, things are a bit more in the grey area.</p>\n<p>First, you have DEXs - <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-decentralized-exchange-dex/">decentralized cryptocurrency exchange platforms</strong></a>. Individuals who trade on these platforms are able to remain <strong>completely anonymous</strong> in doing so. As you can imagine, Russian citizens were not an exception in this regard - theoretically, DEXs could have helped Russians avoid all of those aforementioned sanctions.</p>\n<p>The situation isn’t all that much better with <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-centralized-exchange-cex/">centralized exchanges</strong></a>, either. While many of them do comply with KYC laws and regulations, this compliance is often very surface-level, and not in-line with other, traditional financial institutions. That’s because crypto regulation is still a very uncertain topic, and there are a lot of grey areas and loopholes.</p>\n<p>One of the best examples of this would be <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/goon/kraken/" target=\"_blank\" rel=\"nofollow noindex noopener\"><strong>Kraken</strong></a>, a well-known and highly-respected cryptocurrency exchange. Kraken CEO, Jesse Powel, has said that the exchange will comply with the sanctions as much as the legalities of the matter are concerned, but that the platform won’t ban Russian users outright, since this would be unfair, granted that there are plenty of people in the country that did not support Russia’s actions in Ukraine.</p>\n<p>To top it all off, Russia developed the so-called “<strong>digital ruble</strong>”, a virtual version of the country’s currency. Back in 2020, Russia’s Central Bank had pointed out that the digital ruble would make Russia “more independent” from the West, and ease many potential sanctions that other countries could impose on them.</p>\n<p>So, with all of that in mind, what’s the answer here - could cryptocurrencies truly pose a risk of mitigating, or even nullifying the sanctions imposed on Russia?</p>\n<p><strong>Well, I think that no - not even by a long shot. </strong>Allow me to elaborate on this, and explain why I think so.</p>\n<h3>Devaluation</h3>\n<p>The very first problem for countries sanctioned like Russia is the devaluation of money.</p>\n<p>Devaluation is basically the deliberate downward adjustment of the value of a country's money relative to another currency, usually US dollars.</p>\n<p>So, think of it this way: imagine there is a bank: 50% filled with, say Russian rubles, and 50% with US dollars. One day, everybody starts bringing their rubles to the bank to get US dollars in exchange. Guess what happens? Banks start accumulating more rubles and losing dollars. Which one do you think will grow in price, and which one will become worthless?</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_3.o.jpg/" alt=\"The practical use of cryptocurrencies: Devaluation.\" width=\"1000\" height=\"1231\" /></p>\n<p>Because of the massive and constant demand for dollars, <strong>the ruble will definitely start to go down</strong> each time a new <em>babushka</em> brings her already low-valued rubles into the bank, compared to the US dollar, which will grow like crazy. The same will happen with rubles and <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-bitcoin-btc/">Bitcoins - the Bitcoin price will grow, because the enormous demand will affect the market, and the ruble will keep going down to the bottom.</p>\n<p>From the governmental point of view, this move is lethal, and they will never allow their own currency to lose value, in exchange for an uncontrolled, not government-specific one.</p>\n<p>So, to be clear, if your average Russian starts using crypto, this will devalue the ruble even more - that, in turn, would weaken Russia’s power. It is said that the Russian Central Bank is actually cracking down on crypto, altogether!</p>\n<p>Additionally, very recently,<strong> the Russian government issued new laws</strong> that limited Russian citizens from sending, receiving, and transacting with any foreign currency, such as USD.</p>\n<p>Specifically, upon receiving foreign currency, Russian citizens had to convert 80% of the total sum into rubles in three days, or risk getting fined. So, even if you resided in Russia, and traded your cryptocurrencies into USD or EUR, you would need to switch it to rubles, almost immediately.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_5.o.jpg/" alt=\"The practical use of cryptocurrencies: Converting 80% of the total sum of foreign currency into rubles.\" width=\"1000\" height=\"533\" /></p>\n<p>This comes with not one, but TWO additional problems - the fact that the <strong>ruble was tanking in price, and was very volatile,</strong> as well as the fact that there simply <strong>wasn't enough liquidity on the market</strong> for the entirety of Russia to swap between crypto and some traditional currency.</p>\n<h3>Mass Adoption</h3>\n<p>The second issue that sanctioned countries such as Russia face is mass adoption.</p>\n<p>Let's say you have a jar of 100 candies. A child comes and eats 97 candies, all at once. However, you manage to stop the child right before he eats all 100 candies, so there are 3 left. Now, do you think that the 3 candies left will make a big difference for the child's health?</p>\n<p>How does this tie into what we’re talking about today? Well, a lot of attention was placed on crypto, in regards to Russia and the sanctions - I'm talking about the mainstream media, many politicians, and so on. What the above example illustrates is that <strong>cryptocurrencies were way too small for them to make a difference,</strong> in the grand scheme of things!</p>\n<p>Around 3% of the global population actually hold crypto, in any form. Following that, people usually hold small amounts of crypto, too - very few have all of their life savings invested into the space. A popular number that I’ve seen thrown around online is 10% - so, sure, let’s say that 10% of crypto holders have their life savings invested into the space.</p>\n<p>So, less than 0,3% of the total global net worth is currently in crypto. Let’s transfer this example to Russia - even if 0,3% <em>(and I’m being generous with this number)</em> of Russians hold a lot of cryptocurrencies, that’s still a very small number. In circumstances like these, <strong>sudden and unexpected mass adoption within the country is simply impossible.</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_6.o.jpg/" alt=\"The practical use of cryptocurrencies: Around 3% of the global population holds crypto.\" width=\"1000\" height=\"427\" /></strong></p>\n<p>Where is the rest of all the money, though? Where’s the 99,7%?</p>\n<p>Two places - people’s pockets, and bank accounts.</p>\n<p>Instead of focusing on crypto, all of the sanctions should be focused on traditional banking and money flow mechanisms - again, crypto is just too small to make a real difference for them!</p>\n<p>Another barrier to mass adoption is your partners. Internally, Russians have no problems getting and spending their rubles, but if they do business with foreign companies, this is a big issue. </p>\n<p><em>Why?</em></p>\n<p>Imagine that you’ve swallowed all of the sanctions, and decided to jump into the crypto bandwagon to help your business survive. The problem will appear on the other side - that of your foreign partners.</p>\n<p>As an example, your business is to retail iPhones, and you order them in bulk from international distributors - foreign companies. Even if you become crypto-friendly, it will not change anything, because overseas companies that you deal with will still be aware of the entire situation. No big foreign distributor will sell you iPhones officially, in exchange for crypto!</p>\n<p>The same situation can be applied to ordinary Russians, as well. Say, a babushka’s grandson has emigrated into the US and is helping her by sending part of his income every month. Now, his task is to learn how to make those same transactions, but in crypto! On top of that, he will then need to teach his old babushka to use crypto, too. For a big chunk of the old population in Russia, this is a huge \"no-go\" option.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_7.o.jpg/" alt=\"The practical use of cryptocurrencies: Teaching babushka to use crypto.\" width=\"1000\" height=\"670\" /></p>\n<p>Speaking of mass adoption and partners, a comment that was often made is that <strong>Russia could have simply traded with China, </strong>with the help of crypto. Well, cryptocurrencies are banned in China, at least at the time I’m writing this section - same as Russia, the country doesn’t look favorably on decentralized and anonymity-preserving currencies. </p>\n<p>Do you really think the great Communist Party of China will agree on crypto matters, just to give you a better option to buy an iPhone plastic cover, fake Ipad, or a couple of low-quality gadgets on AliExpress using crypto?</p>\n<p>Even if this situation was more lenient, that wouldn’t really change much, since you then have to think about the entire <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-supply-chain/">supply chain</strong></a>, how the trades would happen, and how they could be hidden from the rest of the world.</p>\n<p><strong>Spoiler alert - they couldn’t.</strong></p>\n<h3>Privacy</h3>\n<p>The third issue that sanctioned countries such as Russia face is privacy.</p>\n<p><strong>In Russia - cash is the king.</strong> Think about it this way - normally, you were getting lots of cash in suitcases, and spending it the same way. Buying your Lambo, a house, or simply a burger on a street in cash - this is the reality in Russia, and nobody cares how you got your money. With crypto, it's all impossible. People would be afraid to be tracked and taxed - it’s a big deterrent for most Russians!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_8.o.jpg/" alt=\"The practical use of cryptocurrencies: Privacy.\" width=\"1000\" height=\"638\" /></p>\n<p><strong>Cryptocurrency transactions aren’t as untraceable as you might think.</strong> While your trades are anonymous, on the very basic level, there are special companies that are dedicated to analyzing on-chain data, for different types of cryptos.</p>\n<p>So, if you trade Bitcoin, your address might eventually be flagged as being located in Russia. This, in turn, would prevent many centralized exchanges from offering their services to you, and cause a lot of additional issues.</p>\n<p>This is especially so true when you consider the fact that US Senators were looking into the topic by raising the question of how Russia could use digital currencies to overcome and avoid the sanctions imposed on the country.</p>\n<p>Granted that the US was looking into the matter, it was very possible that there couldn't really be a major loophole for Russians to use when it comes to crypto.</p>\n<p>Now, I can hear you asking - <strong>what about privacy coins?</strong> Couldn't Russia have used those, in order to avoid sanctions?</p>\n<p>Alright, let’s take a look at them. Specifically, let’s take the most popular privacy coin - <strong>Monero</strong> - as an example.</p>\n<p>Monero, at the time of writing this section, had a <strong>market cap of around $3 billion.</strong> That’s a large number, for a cryptocurrency that was created to be virtually untraceable! However, the <strong>total GDP of Russia was $1,5 trillion. </strong>So, Monero makes up 0,2% of the total GDP of Russia. Once again, as you can probably imagine, that’s practically nothing, in the grand scheme of things.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_9.o.jpg/" alt=\"The practical use of cryptocurrencies: The total GPD of Russia - $1.5 trillion.\" width=\"1000\" height=\"544\" /></p>\n<p>So, here’s an example. Let’s imagine that ALL of the $3 billion worth of Monero would be accessible to be used in Russia. That’s impossible, but for the sake of this example, let’s just assume that.</p>\n<p>If that was the case, only 2 out of 1000 Russians would have access to Monero, on average. Again, though - this is assuming that the entirety of the Monero market cap is located in Russia and that the GDP is spread out equally throughout the country. In reality, that number is much, MUCH worse.</p>\n<h2>Conclusions</h2>\n<p>So, could a country function only on cryptocurrencies? Could crypto substitute traditional currencies and become the one and only payment method? <strong>Well, as of now, no, that's definitely not possible.</strong></p>\n<p>Even though crypto is seemingly everywhere in the news, and everyone’s talking about mass adoption, it’s still WAY too small and too complicated for countries to use it as the main currency, and this is why it’s a huge opportunity for us to dive in as early adopters!</p>","meta_title":"Can Crypto Become the One and Only Currency?","meta_description":"Wondering if crypto could substitute traditional currencies? Can it become the main currency of a country? Find that out right here!","meta_keywords":null,"order":13,"language":"en","created_at":"2022-05-03T13:48:01.000000Z","updated_at":"2022-10-05T10:34:01.000000Z","modified_content":"<p>The whole concept of cryptocurrencies is getting more and more popular every day. A lot of countries are integrating crypto as a payment method for certain services. For example, you can even pay with crypto for some KFC chicken wings in Canada.</p>\n<p>However, can a country forget all traditional currencies and payment methods and function purely on cryptocurrencies? This scenario would definitely come in handy in a lot of different situations - for example, when a country is facing massive sanctions from other countries. If this was the case, maybe crypto could even help evade these sanctions?</p>\n<p>Let's take a <strong>real-world example</strong> <strong>of the biggest sanctions in history</strong> placed by the Western world on Russia during the military crisis in Ukraine to try to answer these questions. Keep in mind that these sanctions include the denial of a lot of financial tools, too - SWIFT, VISA, MasterCard, and so on.</p>\n<p>Also, I’d like to stress again that this situation could happen in any other country around the world - Russia, in this case, is just <strong>a real-world example.</strong> Keep in mind that it should only be viewed as <strong>a case study!</strong></p>\n<p><em>So, let’s get right to it.</em></p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 comparison-suggestion pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/images/compare-crypto-exchanges.gif/"/n alt=\"Can Russia Use Crypto to Bypass Sanctions? (Animated)\"\n title=\"Can Russia Use Crypto to Bypass Sanctions? (Animated)\" class=\"border-0\">\n <p>Video Explainer</p>\n </div>\n </div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: The Practical Use of Crypto</h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"The Practical Use of Crypto\" video explainer</p>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"2vVj6jAuBNE\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"></div>\n <p class=\"text-left dyk-video-title\">Can Russia Use Crypto to Bypass Sanctions? (Animated)</p>\n <img src=https://www.bitdegree.org/"https://i.ytimg.com/vi/2vVj6jAuBNE/hq720.jpg/"/n alt=\"Can Russia Use Crypto to Bypass Sanctions? (Animated)\"\n title=\"Can Russia Use Crypto to Bypass Sanctions? (Animated)\"\n class=\"p-0\">\n <img class=\"play-button\" data-target=\"#video-modal\"\n src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/video-button.png/"/n alt=\"Can Russia Use Crypto to Bypass Sanctions? 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Instead, let’s focus on the topic at hand.</p>\n<p>Due to the unjustifiable aggression, Western countries - the United States, the EU, and a few others -<strong> issued a lot of various sanctions against Russia</strong>. Many of these sanctions targeted specific, high-ranking Russian oligarchs - most, however, were aimed at Russia’s economy.</p>\n<p>In addition to these said sanctions, many Western companies also halted their business within the country, during the time of the crisis. So, let’s take a closer look at these sanctions and withdrawals.</p>\n<p>For starters, probably the biggest blow to the Russian economy was <strong>the partial denial of SWIFT within the country.</strong></p>\n<p>What is SWIFT? Officially, the term SWIFT is abbreviated as “The Society for Worldwide Interbank Financial Telecommunication”.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_2.o.jpg/" alt=\"The practical use of cryptocurrencies: SWIFT.\" width=\"1000\" height=\"463\" /></p>\n<p>So in short, <strong>SWIFT is a financial worldwide messaging service.</strong> It’s like a niche internet or even a social network, just between banking institutions. To be more specific, it’s a tool that banks worldwide use to communicate transactions between one another.</p>\n<p>SWIFT doesn’t deal with the transactions directly, but instead, it allows banks to communicate these transactions in the form of messages to one another, and <strong>it serves 32 million financial messages per day on average! </strong><em>So yeah - now you see, it's a really massive network.</em></p>\n<p>Allow me to illustrate SWIFT operations with an example, so that you could understand it even better.</p>\n<p>Let’s say, you have a friend named Tom, and want to send $10 to him, via a bank transfer. However, Tom uses a different banking platform.</p>\n<p>As you make the transaction, your bank messages Tom’s bank about it - it informs Tom’s bank that there’s a transaction incoming, from you to Tom and that it’s $10. All of this information is relayed via the SWIFT network.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_1.o.jpg/" alt=\"The practical use of cryptocurrencies: Sanctions in Russia.\" width=\"1000\" height=\"818\" /></p>\n<p>Without SWIFT, banks would need to rely on <strong>emails and poor encryption-possessing messages</strong> - as you can probably understand, this is far from ideal, since we’re talking about financial operations here.</p>\n<p>In order to understand the magnitude of the SWIFT ban in Russia, think of it this way - in 2020, there were a bit <strong>over 20 million messages per year</strong> sent on the Bank of Russia SPFS system (“System for Transfer of Financial Messages” - a Russian alternative to SWIFT). By comparison, during that same year, there were <strong>over 110 million messages</strong> sent in Russia via SWIFT and other non-Russian bank messaging services.</p>\n<p>However, as of March 7th, 2022, there were 7 Russian banks banned from using SWIFT. It was also stated that, if Russia continues its aggression against Ukraine, more banks would be included in the ban too.</p>\n<p>With all of that being said, what did all of this meant for Russia, in the first place?</p>\n<p>Well, to put it simply, <strong>Russian banks weren't able to communicate with banks located in other countries</strong> and were, thus, cut off from the rest of the world. Russians weren't able to send and receive money to and from foreigners, payments were frozen, and credits weren't possible to be issued. According to the announcement of the SWIFT ban, the Russian ruble crashed by 30%, in price.</p>\n<p>The next huge blow to the Russian economy was<strong> the announcements made by VISA, MasterCard, and American Express.</strong> All three companies seized their operations within the country - if you resided in Russia, and owned any of the three debit cards, you were not able to perform any transactions with them. Even international electronic payment methods like PayPal stopped supporting transactions in Russia.</p>\n<p>This was huge for obvious reasons. Take VISA, as the simplest example - it’s probably the most popular payment facilitator in the world, being supported on the vast majority of online marketplaces, and used by over 2 billion <em>(yes, you heard right - “billions”!)</em> people around the world.</p>\n<p>Naturally, there were MANY more finance-related sanctions imposed on Russia - these are just among the most notable ones. Summing all of that up, however, it’s safe to say that these sanctions and major financial company withdrawals from the country were crippling to the Russian economy.</p>\n<p><em>Now, then… Where does crypto come into all of this?</em></p>\n<h2>Cryptocurrencies as a Tool for Russia to Avoid Sanctions?</h2>\n<p>As financial sanctions continued to be imposed on Russia, many people began questioning whether the country could <strong>use cryptocurrencies to mitigate some of the effects of these sanctions.</strong> In order to understand how this could be possible, you first need to get familiar with the term “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-know-your-customer-kyc/">KYC”.
/nKYC stands for “<strong>Know Your Customer</strong>”. It’s a set of financial regulations that all banking and financial institutions around the world must comply with, to some extent. Essentially, these institutions must collect information about their customers (identify them), in order to identify and prevent any and all potential fraud, money laundering, and other types of defrauding activities.</p>\n<p>Traditional banking institutions comply with and enact some very strict KYC checks. This is because, by default, traditional banks are very strictly regulated. With cryptocurrencies, things are a bit more in the grey area.</p>\n<p>First, you have DEXs - <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-decentralized-exchange-dex/">decentralized cryptocurrency exchange platforms</strong></a>. Individuals who trade on these platforms are able to remain <strong>completely anonymous</strong> in doing so. As you can imagine, Russian citizens were not an exception in this regard - theoretically, DEXs could have helped Russians avoid all of those aforementioned sanctions.</p>\n<p>The situation isn’t all that much better with <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-centralized-exchange-cex/">centralized exchanges</strong></a>, either. While many of them do comply with KYC laws and regulations, this compliance is often very surface-level, and not in-line with other, traditional financial institutions. That’s because crypto regulation is still a very uncertain topic, and there are a lot of grey areas and loopholes.</p>\n<p>One of the best examples of this would be <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/goon/kraken/" target=\"_blank\" rel=\"nofollow noindex noopener\"><strong>Kraken</strong></a>, a well-known and highly-respected cryptocurrency exchange. Kraken CEO, Jesse Powel, has said that the exchange will comply with the sanctions as much as the legalities of the matter are concerned, but that the platform won’t ban Russian users outright, since this would be unfair, granted that there are plenty of people in the country that did not support Russia’s actions in Ukraine.</p>\n<p>To top it all off, Russia developed the so-called “<strong>digital ruble</strong>”, a virtual version of the country’s currency. Back in 2020, Russia’s Central Bank had pointed out that the digital ruble would make Russia “more independent” from the West, and ease many potential sanctions that other countries could impose on them.</p>\n<p>So, with all of that in mind, what’s the answer here - could cryptocurrencies truly pose a risk of mitigating, or even nullifying the sanctions imposed on Russia?</p>\n<p><strong>Well, I think that no - not even by a long shot. </strong>Allow me to elaborate on this, and explain why I think so.</p>\n<h3>Devaluation</h3>\n<p>The very first problem for countries sanctioned like Russia is the devaluation of money.</p>\n<p>Devaluation is basically the deliberate downward adjustment of the value of a country's money relative to another currency, usually US dollars.</p>\n<p>So, think of it this way: imagine there is a bank: 50% filled with, say Russian rubles, and 50% with US dollars. One day, everybody starts bringing their rubles to the bank to get US dollars in exchange. Guess what happens? Banks start accumulating more rubles and losing dollars. Which one do you think will grow in price, and which one will become worthless?</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_3.o.jpg/" alt=\"The practical use of cryptocurrencies: Devaluation.\" width=\"1000\" height=\"1231\" /></p>\n<p>Because of the massive and constant demand for dollars, <strong>the ruble will definitely start to go down</strong> each time a new <em>babushka</em> brings her already low-valued rubles into the bank, compared to the US dollar, which will grow like crazy. The same will happen with rubles and <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-bitcoin-btc/">Bitcoins - the Bitcoin price will grow, because the enormous demand will affect the market, and the ruble will keep going down to the bottom.</p>\n<p>From the governmental point of view, this move is lethal, and they will never allow their own currency to lose value, in exchange for an uncontrolled, not government-specific one.</p>\n<p>So, to be clear, if your average Russian starts using crypto, this will devalue the ruble even more - that, in turn, would weaken Russia’s power. It is said that the Russian Central Bank is actually cracking down on crypto, altogether!</p>\n<p>Additionally, very recently,<strong> the Russian government issued new laws</strong> that limited Russian citizens from sending, receiving, and transacting with any foreign currency, such as USD.</p>\n<p>Specifically, upon receiving foreign currency, Russian citizens had to convert 80% of the total sum into rubles in three days, or risk getting fined. So, even if you resided in Russia, and traded your cryptocurrencies into USD or EUR, you would need to switch it to rubles, almost immediately.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_5.o.jpg/" alt=\"The practical use of cryptocurrencies: Converting 80% of the total sum of foreign currency into rubles.\" width=\"1000\" height=\"533\" /></p>\n<p>This comes with not one, but TWO additional problems - the fact that the <strong>ruble was tanking in price, and was very volatile,</strong> as well as the fact that there simply <strong>wasn't enough liquidity on the market</strong> for the entirety of Russia to swap between crypto and some traditional currency.</p>\n<h3>Mass Adoption</h3>\n<p>The second issue that sanctioned countries such as Russia face is mass adoption.</p>\n<p>Let's say you have a jar of 100 candies. A child comes and eats 97 candies, all at once. However, you manage to stop the child right before he eats all 100 candies, so there are 3 left. Now, do you think that the 3 candies left will make a big difference for the child's health?</p>\n<p>How does this tie into what we’re talking about today? Well, a lot of attention was placed on crypto, in regards to Russia and the sanctions - I'm talking about the mainstream media, many politicians, and so on. What the above example illustrates is that <strong>cryptocurrencies were way too small for them to make a difference,</strong> in the grand scheme of things!</p>\n<p>Around 3% of the global population actually hold crypto, in any form. Following that, people usually hold small amounts of crypto, too - very few have all of their life savings invested into the space. A popular number that I’ve seen thrown around online is 10% - so, sure, let’s say that 10% of crypto holders have their life savings invested into the space.</p>\n<p>So, less than 0,3% of the total global net worth is currently in crypto. Let’s transfer this example to Russia - even if 0,3% <em>(and I’m being generous with this number)</em> of Russians hold a lot of cryptocurrencies, that’s still a very small number. In circumstances like these, <strong>sudden and unexpected mass adoption within the country is simply impossible.</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_6.o.jpg/" alt=\"The practical use of cryptocurrencies: Around 3% of the global population holds crypto.\" width=\"1000\" height=\"427\" /></strong></p>\n<p>Where is the rest of all the money, though? Where’s the 99,7%?</p>\n<p>Two places - people’s pockets, and bank accounts.</p>\n<p>Instead of focusing on crypto, all of the sanctions should be focused on traditional banking and money flow mechanisms - again, crypto is just too small to make a real difference for them!</p>\n<p>Another barrier to mass adoption is your partners. Internally, Russians have no problems getting and spending their rubles, but if they do business with foreign companies, this is a big issue. </p>\n<p><em>Why?</em></p>\n<p>Imagine that you’ve swallowed all of the sanctions, and decided to jump into the crypto bandwagon to help your business survive. The problem will appear on the other side - that of your foreign partners.</p>\n<p>As an example, your business is to retail iPhones, and you order them in bulk from international distributors - foreign companies. Even if you become crypto-friendly, it will not change anything, because overseas companies that you deal with will still be aware of the entire situation. No big foreign distributor will sell you iPhones officially, in exchange for crypto!</p>\n<p>The same situation can be applied to ordinary Russians, as well. Say, a babushka’s grandson has emigrated into the US and is helping her by sending part of his income every month. Now, his task is to learn how to make those same transactions, but in crypto! On top of that, he will then need to teach his old babushka to use crypto, too. For a big chunk of the old population in Russia, this is a huge \"no-go\" option.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_7.o.jpg/" alt=\"The practical use of cryptocurrencies: Teaching babushka to use crypto.\" width=\"1000\" height=\"670\" /></p>\n<p>Speaking of mass adoption and partners, a comment that was often made is that <strong>Russia could have simply traded with China, </strong>with the help of crypto. Well, cryptocurrencies are banned in China, at least at the time I’m writing this section - same as Russia, the country doesn’t look favorably on decentralized and anonymity-preserving currencies. </p>\n<p>Do you really think the great Communist Party of China will agree on crypto matters, just to give you a better option to buy an iPhone plastic cover, fake Ipad, or a couple of low-quality gadgets on AliExpress using crypto?</p>\n<p>Even if this situation was more lenient, that wouldn’t really change much, since you then have to think about the entire <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-supply-chain/">supply chain</strong></a>, how the trades would happen, and how they could be hidden from the rest of the world.</p>\n<p><strong>Spoiler alert - they couldn’t.</strong></p>\n<h3>Privacy</h3>\n<p>The third issue that sanctioned countries such as Russia face is privacy.</p>\n<p><strong>In Russia - cash is the king.</strong> Think about it this way - normally, you were getting lots of cash in suitcases, and spending it the same way. Buying your Lambo, a house, or simply a burger on a street in cash - this is the reality in Russia, and nobody cares how you got your money. With crypto, it's all impossible. People would be afraid to be tracked and taxed - it’s a big deterrent for most Russians!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_8.o.jpg/" alt=\"The practical use of cryptocurrencies: Privacy.\" width=\"1000\" height=\"638\" /></p>\n<p><strong>Cryptocurrency transactions aren’t as untraceable as you might think.</strong> While your trades are anonymous, on the very basic level, there are special companies that are dedicated to analyzing on-chain data, for different types of cryptos.</p>\n<p>So, if you trade Bitcoin, your address might eventually be flagged as being located in Russia. This, in turn, would prevent many centralized exchanges from offering their services to you, and cause a lot of additional issues.</p>\n<p>This is especially so true when you consider the fact that US Senators were looking into the topic by raising the question of how Russia could use digital currencies to overcome and avoid the sanctions imposed on the country.</p>\n<p>Granted that the US was looking into the matter, it was very possible that there couldn't really be a major loophole for Russians to use when it comes to crypto.</p>\n<p>Now, I can hear you asking - <strong>what about privacy coins?</strong> Couldn't Russia have used those, in order to avoid sanctions?</p>\n<p>Alright, let’s take a look at them. Specifically, let’s take the most popular privacy coin - <strong>Monero</strong> - as an example.</p>\n<p>Monero, at the time of writing this section, had a <strong>market cap of around $3 billion.</strong> That’s a large number, for a cryptocurrency that was created to be virtually untraceable! However, the <strong>total GDP of Russia was $1,5 trillion. </strong>So, Monero makes up 0,2% of the total GDP of Russia. Once again, as you can probably imagine, that’s practically nothing, in the grand scheme of things.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/can_crypto_mitigate_sanctions_9.o.jpg/" alt=\"The practical use of cryptocurrencies: The total GPD of Russia - $1.5 trillion.\" width=\"1000\" height=\"544\" /></p>\n<p>So, here’s an example. Let’s imagine that ALL of the $3 billion worth of Monero would be accessible to be used in Russia. That’s impossible, but for the sake of this example, let’s just assume that.</p>\n<p>If that was the case, only 2 out of 1000 Russians would have access to Monero, on average. Again, though - this is assuming that the entirety of the Monero market cap is located in Russia and that the GDP is spread out equally throughout the country. In reality, that number is much, MUCH worse.</p>\n<h2>Conclusions</h2>\n<p>So, could a country function only on cryptocurrencies? Could crypto substitute traditional currencies and become the one and only payment method? <strong>Well, as of now, no, that's definitely not possible.</strong></p>\n<p>Even though crypto is seemingly everywhere in the news, and everyone’s talking about mass adoption, it’s still WAY too small and too complicated for countries to use it as the main currency, and this is why it’s a huge opportunity for us to dive in as early adopters!</p>","preview_url":"https://www.bitdegree.org/crypto/learn/practical-use-of-cryptocurrencies","youtube_video":{"id":19,"channel_id":1,"sort":43,"video_title":"Can Russia Use Crypto to Bypass Sanctions? (Animated)","description":"Can Russia use crypto to bypass sanctions?\n\nDue to Russia unjustifiably attacking Ukraine, Western countries and their allies are imposing a series of sanctions on Russia. The list of sanctions, as well as foreign companies leaving the country, is getting bigger every day.\n\nThere is a general notion online that Russia could mitigate the damage done by these sanctions by utilizing cryptocurrencies. In this video, I will tell you about the most significant sanctions imposed on Russia thus far, and also, whether or not crypto could help the country minimize the damage done to its economy by those said sanctions.\n\nWhat role do you think cryptocurrencies play, when it comes to the Russia’s war in Ukraine? Share your opinion in the comments below.\n\nVideo Time Table:\n\n0:00 Introduction to Can Russia Use Crypto to Bypass Sanctions\n1:17 Sanctions in Russia\n5:06 Crypto as a Tool to Avoid Sanctions?\n7:16 Issues Faced by Sanctioned Russia: Devaluation\n9:03 Issues Faced by Sanctioned Russia: Mass Adoption\n12:01 Issues Faced by Sanctioned Russia: Privacy\n14:18 Wrap-up: Can Russia Use Crypto to Bypass Sanctions?\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps://twitter.com/crypto_xplained\n\n#RussiaSanctions #SanctionsAgainstRussia #RussiaCrypto","video_id":"2vVj6jAuBNE","duration":916,"view_count":521,"thumbnail_url":"https://i.ytimg.com/vi/2vVj6jAuBNE/hq720.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-03-31 16:29:44","created_at":"2022-03-31T23:00:01.000000Z","updated_at":"2023-05-21T23:00:04.000000Z","channel":{"id":1,"title":"CryptoFinallyExplained","channel_id":"UCOryUY0yxC08eJtK23mNgiA","main_playlist_id":"UUOryUY0yxC08eJtK23mNgiA"}}},"chapterTitle":"Crypto Exchanges","cryptoBookSection":{"id":335,"featured_image_id":8223,"original_id":null,"youtube_video_id":128,"author_id":42,"translator_id":null,"chapter_id":3,"title":"How do Cryptocurrency Exchanges Work?","slug":"how-do-cryptocurrency-exchanges-work","definition":"Did you know that you can trade digital assets on cryptocurrency exchanges anytime you want? This includes daytime, nighttime, weekends, and holidays.","status":"published","content":"<p><strong>In this section, I will explain how do cryptocurrency exchanges work!</strong></p>\n<p>So - you’ve heard about cryptocurrencies, you are really excited to jump into this industry, and you are looking for a great way to start your crypto journey by buying some coins and tokens for yourself. Naturally, your very first instinct would be to visit a crypto exchange!</p>\n<p>However, as you go to register on a select exchange platform of your choice, you catch yourself wondering - <strong>how do cryptocurrency exchanges work, really?</strong> Is there, like, a person who takes care of all of your orders? What about some of the additional features of exchanges, such as crypto storage and user data collection? Well, that’s what we’ll talk about, today!</p>\n<p>In this section, we are going to talk about cryptocurrency exchanges, and how they work. Specifically, I’ll tell you about the history of crypto exchange platforms, how these exchanges store your crypto and facilitate trades, as well as a bit about the different types of exchanges that you might come across, too!</p>\n<p><em>Without further ado, let’s get to it!</em></p>\n<h2>The History of Cryptocurrency Exchange Platforms</h2>\n<p>To start things off, let’s first look into what is a crypto exchange, as well as the general history of crypto exchanges, shall we? Don’t worry - I won’t bore you with the technical details, and we’ll only focus on the bigger picture!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How do cryptocurrency exchanges work: The history of crypto exchange platforms.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_are_crypto_exchanges_01.o.jpg/" alt=\"How do cryptocurrency exchanges work: The history of crypto exchange platforms.\" width=\"1000\" height=\"505\" /></p>\n<p>Truth be told, cryptocurrency exchanges have a pretty exciting, yet also often rocky history. Today, it’s really difficult to track the very first exchange - if there’s one thing for certain, though, it’s the fact that the first few exchanges that came around after the creation of <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-bitcoin-btc/">Bitcoin back in 2009 were very basic, in their design. <strong>All you could really do was trade BTC</strong> - admittedly, that was arguably all the market needed, back in those days!</p>\n<p>As time went on, the number of cryptocurrencies grew, exponentially - this is especially true after <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-ethereum-eth/">Ethereum launched, and brought <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-smart-contract/">smart contracts</strong></a> to the world of crypto. With all of these new coins and tokens, exchanges needed to keep up, as well - slowly but surely, some of <strong>the top exchange platforms in the industry started introducing new features to their clients</strong>. Now, you could not only trade crypto, but also buy it with fiat money, lend and borrow coins & tokens, stake your favorite assets, and so on.</p>\n<p>Essentially, it seems that with every new wave of crypto technology (such as <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-non-fungible-token-nft/">NFTs, <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-defi/">DeFi, crypto gaming, and so on), there come new features available on crypto exchanges, as well. This is really good, since it means that exchanges are “keeping up” with the trends, and catering to their clients’ wants and needs.</p>\n<p>While all of that sounds like sunshine and rainbows, the reality, however, is quite different. Historically speaking, <strong>there have been countless instances when exchanges got hacked</strong>, and the funds kept on them got stolen, never to be seen again. If you were to keep your crypto on such an exchange, you’d likely lose the entirety of your portfolio!</p>\n<p>Anyone learning about what is a crypto exchange should also look into one of the most legendary of such instances that happened in 2011, with <strong>the infamous Mt. Gox crypto exchange</strong>. While it’s a story that requires a separate section, in of its own, the short version is that, over the period of a few years, huge amounts of Bitcoin were being stolen from the exchange’s <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-hot-wallet/">hot wallet</strong></a>, in addition to users having their data leaked to malicious third-party data harvesters. Today, Mt. Gox is still seen as one of the most notorious instances of crypto hacking, and has become a sort of a legend among crypto enthusiasts worldwide.</p>\n<p>All of those things - both the good, as well as the bad ones - bring us to the present date. Today, there are a few world-famous exchanges on the market, as well as hundreds of alternatives. For example, probably the biggest crypto exchange in the world is <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/goon/binance/" target=\"_blank\" rel=\"nofollow noindex noopener\"><strong>Binance</strong></a> - a platform that houses a huge variety of different features and services, and acts as a sort of a crypto hub. So, <strong>each platform strives to be better than its competitors</strong>, when it comes to offering their users the ability to interact with their crypto in as many different ways as possible.</p>\n<p>Truth be told, many present-day exchanges can now be considered <strong>crypto hubs</strong>, due to the sheer variety of features that they offer!</p>\n<h2>How Do Cryptocurrency Exchanges Work?</h2>\n<p>Now that you know a bit about the history behind crypto exchange platforms, let’s continue by focusing on the core question at hand - <strong>how do cryptocurrency exchanges work?</strong></p>\n<p>For this, I’ll need you to use your imagination, since we’re going to go through a few examples.</p>\n<p>For starters, imagine that you’re a newbie investor, and are looking to buy your very first Bitcoin. You decide to go with a popular exchange platform, such as the aforementioned Binance.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How do cryptocurrency exchanges work: An example with Binance.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_are_crypto_exchanges_02.o.jpg/" alt=\"How do cryptocurrency exchanges work: An example with Binance.\" width=\"1000\" height=\"956\" /></p>\n<p>The very first thing that you’ll need to do is register on the exchange, and provide it with <strong>proof of your identity</strong>. In this regard, crypto exchanges act as any other financial institution - they need to identify you, as a means to prevent any fraud, money laundering, and other shady activities that malicious people might think of doing.</p>\n<p>Once you pass all of the identification processes, you will now be permitted to buy your very first crypto. Since this is 2022 and not 2010, most exchanges - Binance included - will allow you to <strong>use a <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-fiat/">fiat payment method, such as a credit or debit card</strong>.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How do cryptocurrency exchanges work:\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_are_crypto_exchanges_03.o.jpg/" alt=\"How do cryptocurrency exchanges work:\" width=\"1000\" height=\"627\" /></p>\n<p>Think of it as if you were to go and purchase ice cream from a vendor at the beach. You choose which ice cream it is that you want, pay for it with an accepted payment method <em>(perhaps the ice cream vendor only accepts cash?)</em>, and that’s it - you can enjoy your fozen treat. Buying crypto these days is really that simple!</p>\n<p>All that you need to do is pick the cryptocurrency that you’d like to buy (such as Bitcoin), add a payment method, and enter the amount of money that you wish to spend. In just a few seconds, your exchange account will be credited with your newly-acquired BTC!</p>\n<p><strong>Now, where does all of that Bitcoin go, you might ask?</strong> Well, this is a big part of understanding how do cryptocurrency exchanges work - the crypto exchange will create an account for you, specific to that cryptocurrency that you’ve bought. Your account will be distinguished by a <strong>public wallet address</strong> <em>(some people call it a public key - that’s not entirely correct, but ya, it still refers to the same thing, in this context).</em></p>\n<p>So, instead of you having to go out and “create” a wallet account for yourself, the exchange that you are using will create one for you. Also, that address will be specific to the crypto asset that you’ve bought - this is true for most cryptocurrencies. That’s because, as you might know, most cryptocurrencies are based on their own networks, and can’t really communicate with one another directly - thus, they can’t be stored on the same wallet, either!</p>\n<p>If all of that sounds really complicated to you, make sure to <strong>check out other sections in our Crypto 101 Handbook</strong>. You’ll be able to find all of the concepts that I’ve just mentioned - crypto wallets, different blockchains, and so on - explained in detail. However, let me still give you an example, to illustrate my point.</p>\n<p>Imagine that you’ve decided to fill your car up with some fuel. You pull up to the gas station, and instinctively start filling your car’s tank up with petrol. After all, it’s a petrol car! Nearby, you notice a few charging stations, for electric vehicles.</p>\n<p>Now, can you charge up your petrol car at an electric station? No, of course not! That’s because petrol cars are completely different from electric ones, even though both of them are still vehicles that serve the same general purposes.</p>\n<p>The same is true with cryptocurrencies, too - <strong>they can’t be stored in a single wallet, since they are based on completely different networks</strong>. However, in the car example, there are both petrol pumps and electric charging stations available in the same gas station. This is equivalent to a cryptocurrency exchange housing multiple different wallets, on the same, single client’s account!</p>\n<p>Haha, I admit - these are some of the more-advanced concepts to wrap your head around! However, it’s still at the core of the services that cryptocurrency exchanges provide.</p>\n<p>Once you have your Bitcoin, the next thing that you might want to do is trade it - once again, that’s a service that you will find available on all exchanges. In this regard, trading works very similarly to how it does with stocks - you have the <strong>market makers</strong> (people who create an order, or buy) <strong>and</strong> <strong>takers</strong> (people who will fill out that order, or sell). The exchange’s mission is to match these two people with one another, and fulfill the order!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How do cryptocurrency exchanges work: Market takers and market makers.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_are_crypto_exchanges_04.o.jpg/" alt=\"How do cryptocurrency exchanges work: Market takers and market makers.\" width=\"1000\" height=\"722\" /></p>\n<p>Of course, as you can imagine, usually things aren’t as simple as that. For example, you might be trading with a <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-liquidity-pool/">liquidity pool</strong></a> of the crypto exchange, instead of an actual person on the other end. Furthermore, I won’t even get into the details of advanced trading features, such as <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-leverage/">leveraged or <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-margin-trading/">margin trading</strong></a> - that’s a whole, separate section.</p>\n<h2>CEXs and DEXs</h2>\n<p>Up to this point, we’ve exclusively talked about what are known as <strong>centralized, or custodial exchanges</strong>. These are cryptocurrency exchange platforms that have a company behind them, and that allow you to keep your crypto on their platforms.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How do cryptocurrency exchanges work: CEXs and DEXs.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_are_crypto_exchanges_05.o.jpg/" alt=\"How do cryptocurrency exchanges work: CEXs and DEXs.\" width=\"1000\" height=\"734\" /></p>\n<p>However, there’s another popular form of exchanges, as well - those of a decentralized nature.</p>\n<p>Now, I won’t go too in-depth into <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-decentralized-exchange-dex/">DEXs, and how they work, since it’s quite a hefty and complicated topic, in of its own.</p>\n<p>As far as this section is concerned, though, you should know that <strong>DEXs offer peer-to-peer trading, and don’t hold any of your cryptocurrencies</strong>. Such exchanges preserve the anonymity and privacy of their users, however, they are also considered to be quite complicated, in addition to placing the entirety of the cryptocurrency management and wallet creation process on you - the user. So, as you study what is a decentralized cryptocurrency exchange, just keep in mind that, if something were to go wrong, there would be <strong>no customer support</strong> to reach out to - that can be scary!</p>\n<p>While decentralized exchanges are a really cool concept, if you’re just starting out, <strong>it’s best to stick to the popular, established platforms</strong>. With them creating a wallet for you, and allowing you to store your crypto with them, it’s a far more beginner-friendly approach. On top of that, the traditional buyer-seller matching available with centralized exchanges is much simpler to understand, if you’re just trying to figure out how cryptocurrency exchanges work!</p>","meta_title":"How do Cryptocurrency Exchanges Work?","meta_description":"Trying to find a simple yet thorough answer to the question: \"how do cryptocurrency exchanges work?\" You'll find exactly that, right here!","meta_keywords":"how do cryptocurrency exchanges work, what is a crypto exchange, biggest crypto exchange in the world, what is a decentralized crypto exchange","order":1,"language":"en","created_at":"2022-10-06T07:36:47.000000Z","updated_at":"2022-11-21T14:54:50.000000Z","modified_content":"<p><strong>In this section, I will explain how do cryptocurrency exchanges work!</strong></p>\n<p>So - you’ve heard about cryptocurrencies, you are really excited to jump into this industry, and you are looking for a great way to start your crypto journey by buying some coins and tokens for yourself. Naturally, your very first instinct would be to visit a crypto exchange!</p>\n<p>However, as you go to register on a select exchange platform of your choice, you catch yourself wondering - <strong>how do cryptocurrency exchanges work, really?</strong> Is there, like, a person who takes care of all of your orders? What about some of the additional features of exchanges, such as crypto storage and user data collection? Well, that’s what we’ll talk about, today!</p>\n<p>In this section, we are going to talk about cryptocurrency exchanges, and how they work. Specifically, I’ll tell you about the history of crypto exchange platforms, how these exchanges store your crypto and facilitate trades, as well as a bit about the different types of exchanges that you might come across, too!</p>\n<p><em>Without further ado, let’s get to it!</em></p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 comparison-suggestion pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/images/compare-crypto-exchanges.gif/"/n alt=\"How do Cryptocurrency Exchanges Work? (Easily Explained!)\"\n title=\"How do Cryptocurrency Exchanges Work? (Easily Explained!)\" class=\"border-0\">\n <p>Video Explainer</p>\n </div>\n </div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: How do Cryptocurrency Exchanges Work?</h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"How do Cryptocurrency Exchanges Work?\" video explainer</p>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"sRawseOB8TY\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"></div>\n <p class=\"text-left dyk-video-title\">How do Cryptocurrency Exchanges Work? (Easily Explained!)</p>\n <img src=https://www.bitdegree.org/"https://i.ytimg.com/vi/sRawseOB8TY/hq720.jpg/"/n alt=\"How do Cryptocurrency Exchanges Work? (Easily Explained!)\"\n title=\"How do Cryptocurrency Exchanges Work? (Easily Explained!)\"\n class=\"p-0\">\n <img class=\"play-button\" data-target=\"#video-modal\"\n src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/video-button.png/"/n alt=\"How do Cryptocurrency Exchanges Work? (Easily Explained!)\">\n </div>\n </div>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div>\n <a href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n class=\"btn yt-promo mb-2\" target=\"_blank\" rel=\"nofollow noopener\">\n <div class=\"row justify-content-center align-items-center mx-0 text-center\">\n <div class=\"col-4 col-md-4\">\n <i class=\"fab fa-youtube yt-dyk-btn\"></i>\n </div>\n <div class=\"col-8 col-md-8 text-center yt-promo-text\">\n <h4 class=\"m-0 text-white\">SUBSCRIBE</h4>\n <span>ON YOUTUBE</span>\n </div>\n </div>\n </a>\n </div>\n </div>\n </div>\n </div>\n</div>\n<div class=\"modal fade\" id=\"video-modal\" tabindex=\"-1\" role=\"dialog\" aria-labelledby=\"sRawseOB8TY\">\n <div class=\"modal-dialog modal-dialog-centered modal-lg\" role=\"document\">\n <div class=\"modal-content\">\n <div class=\"modal-body p-0\">\n <button type=\"button\" class=\"video-modal-close close\" data-dismiss=\"modal\" aria-label=\"Close\">\n <i aria-hidden=\"true\" class=\"fas fa-times\"></i>\n </button>\n <div id=\"iframe\"></div>\n </div>\n <a class=\"text-decoration-none\"\n href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n rel=\"nofollow noopener\" target=\"_blank\">\n <div class=\"modal-footer p-0 d-block bg-white\">\n <div class=\"row justify-content-center m-0\">\n <div class=\"col-3 col-md-4 col-lg-2 p-0\">\n <img class=\"w-100 h-100\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/crypto-subscribe.jpg/" alt=\"Subscribe\">\n </div>\n <div class=\"col-9 col-md-8 col-lg-2 px-0 d-flex\">\n <div class=\"modal-subscribe w-100\">\n <p class=\"m-0 mt-1 mr-3\">SUBSCRIBE<br>\n <span class=\"m-0\">ON YOUTUBE</span>\n </p>\n </div>\n </div>\n <div class=\"col-12 col-md-12 col-lg-8 p-0 text-center d-flex justify-content-center align-items-center\">\n <div class=\"modal-subscribe-text\">\n <h4 class=\"m-0\">Understand crypto with ease</h4>\n <span>New explainer videos every week!</span>\n </div>\n </div>\n </div>\n </div>\n </a>\n </div>\n </div>\n</div>\n<h2>The History of Cryptocurrency Exchange Platforms</h2>\n<p>To start things off, let’s first look into what is a crypto exchange, as well as the general history of crypto exchanges, shall we? Don’t worry - I won’t bore you with the technical details, and we’ll only focus on the bigger picture!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How do cryptocurrency exchanges work: The history of crypto exchange platforms.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_are_crypto_exchanges_01.o.jpg/" alt=\"How do cryptocurrency exchanges work: The history of crypto exchange platforms.\" width=\"1000\" height=\"505\" /></p>\n<p>Truth be told, cryptocurrency exchanges have a pretty exciting, yet also often rocky history. Today, it’s really difficult to track the very first exchange - if there’s one thing for certain, though, it’s the fact that the first few exchanges that came around after the creation of <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-bitcoin-btc/">Bitcoin back in 2009 were very basic, in their design. <strong>All you could really do was trade BTC</strong> - admittedly, that was arguably all the market needed, back in those days!</p>\n<p>As time went on, the number of cryptocurrencies grew, exponentially - this is especially true after <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-ethereum-eth/">Ethereum launched, and brought <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-smart-contract/">smart contracts</strong></a> to the world of crypto. With all of these new coins and tokens, exchanges needed to keep up, as well - slowly but surely, some of <strong>the top exchange platforms in the industry started introducing new features to their clients</strong>. Now, you could not only trade crypto, but also buy it with fiat money, lend and borrow coins & tokens, stake your favorite assets, and so on.</p>\n<p>Essentially, it seems that with every new wave of crypto technology (such as <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-non-fungible-token-nft/">NFTs, <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-defi/">DeFi, crypto gaming, and so on), there come new features available on crypto exchanges, as well. This is really good, since it means that exchanges are “keeping up” with the trends, and catering to their clients’ wants and needs.</p>\n<p>While all of that sounds like sunshine and rainbows, the reality, however, is quite different. Historically speaking, <strong>there have been countless instances when exchanges got hacked</strong>, and the funds kept on them got stolen, never to be seen again. If you were to keep your crypto on such an exchange, you’d likely lose the entirety of your portfolio!</p>\n<p>Anyone learning about what is a crypto exchange should also look into one of the most legendary of such instances that happened in 2011, with <strong>the infamous Mt. Gox crypto exchange</strong>. While it’s a story that requires a separate section, in of its own, the short version is that, over the period of a few years, huge amounts of Bitcoin were being stolen from the exchange’s <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-hot-wallet/">hot wallet</strong></a>, in addition to users having their data leaked to malicious third-party data harvesters. Today, Mt. Gox is still seen as one of the most notorious instances of crypto hacking, and has become a sort of a legend among crypto enthusiasts worldwide.</p>\n<p>All of those things - both the good, as well as the bad ones - bring us to the present date. Today, there are a few world-famous exchanges on the market, as well as hundreds of alternatives. For example, probably the biggest crypto exchange in the world is <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/goon/binance/" target=\"_blank\" rel=\"nofollow noindex noopener\"><strong>Binance</strong></a> - a platform that houses a huge variety of different features and services, and acts as a sort of a crypto hub. So, <strong>each platform strives to be better than its competitors</strong>, when it comes to offering their users the ability to interact with their crypto in as many different ways as possible.</p>\n<p>Truth be told, many present-day exchanges can now be considered <strong>crypto hubs</strong>, due to the sheer variety of features that they offer!</p>\n<h2>How Do Cryptocurrency Exchanges Work?</h2>\n<p>Now that you know a bit about the history behind crypto exchange platforms, let’s continue by focusing on the core question at hand - <strong>how do cryptocurrency exchanges work?</strong></p>\n<p>For this, I’ll need you to use your imagination, since we’re going to go through a few examples.</p>\n<p>For starters, imagine that you’re a newbie investor, and are looking to buy your very first Bitcoin. You decide to go with a popular exchange platform, such as the aforementioned Binance.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How do cryptocurrency exchanges work: An example with Binance.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_are_crypto_exchanges_02.o.jpg/" alt=\"How do cryptocurrency exchanges work: An example with Binance.\" width=\"1000\" height=\"956\" /></p>\n<p>The very first thing that you’ll need to do is register on the exchange, and provide it with <strong>proof of your identity</strong>. In this regard, crypto exchanges act as any other financial institution - they need to identify you, as a means to prevent any fraud, money laundering, and other shady activities that malicious people might think of doing.</p>\n<p>Once you pass all of the identification processes, you will now be permitted to buy your very first crypto. Since this is 2022 and not 2010, most exchanges - Binance included - will allow you to <strong>use a <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-fiat/">fiat payment method, such as a credit or debit card</strong>.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How do cryptocurrency exchanges work:\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_are_crypto_exchanges_03.o.jpg/" alt=\"How do cryptocurrency exchanges work:\" width=\"1000\" height=\"627\" /></p>\n<p>Think of it as if you were to go and purchase ice cream from a vendor at the beach. You choose which ice cream it is that you want, pay for it with an accepted payment method <em>(perhaps the ice cream vendor only accepts cash?)</em>, and that’s it - you can enjoy your fozen treat. Buying crypto these days is really that simple!</p>\n<p>All that you need to do is pick the cryptocurrency that you’d like to buy (such as Bitcoin), add a payment method, and enter the amount of money that you wish to spend. In just a few seconds, your exchange account will be credited with your newly-acquired BTC!</p>\n<p><strong>Now, where does all of that Bitcoin go, you might ask?</strong> Well, this is a big part of understanding how do cryptocurrency exchanges work - the crypto exchange will create an account for you, specific to that cryptocurrency that you’ve bought. Your account will be distinguished by a <strong>public wallet address</strong> <em>(some people call it a public key - that’s not entirely correct, but ya, it still refers to the same thing, in this context).</em></p>\n<p>So, instead of you having to go out and “create” a wallet account for yourself, the exchange that you are using will create one for you. Also, that address will be specific to the crypto asset that you’ve bought - this is true for most cryptocurrencies. That’s because, as you might know, most cryptocurrencies are based on their own networks, and can’t really communicate with one another directly - thus, they can’t be stored on the same wallet, either!</p>\n<p>If all of that sounds really complicated to you, make sure to <strong>check out other sections in our Crypto 101 Handbook</strong>. You’ll be able to find all of the concepts that I’ve just mentioned - crypto wallets, different blockchains, and so on - explained in detail. However, let me still give you an example, to illustrate my point.</p>\n<p>Imagine that you’ve decided to fill your car up with some fuel. You pull up to the gas station, and instinctively start filling your car’s tank up with petrol. After all, it’s a petrol car! Nearby, you notice a few charging stations, for electric vehicles.</p>\n<p>Now, can you charge up your petrol car at an electric station? No, of course not! That’s because petrol cars are completely different from electric ones, even though both of them are still vehicles that serve the same general purposes.</p>\n<p>The same is true with cryptocurrencies, too - <strong>they can’t be stored in a single wallet, since they are based on completely different networks</strong>. However, in the car example, there are both petrol pumps and electric charging stations available in the same gas station. This is equivalent to a cryptocurrency exchange housing multiple different wallets, on the same, single client’s account!</p>\n<p>Haha, I admit - these are some of the more-advanced concepts to wrap your head around! However, it’s still at the core of the services that cryptocurrency exchanges provide.</p>\n<p>Once you have your Bitcoin, the next thing that you might want to do is trade it - once again, that’s a service that you will find available on all exchanges. In this regard, trading works very similarly to how it does with stocks - you have the <strong>market makers</strong> (people who create an order, or buy) <strong>and</strong> <strong>takers</strong> (people who will fill out that order, or sell). The exchange’s mission is to match these two people with one another, and fulfill the order!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How do cryptocurrency exchanges work: Market takers and market makers.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_are_crypto_exchanges_04.o.jpg/" alt=\"How do cryptocurrency exchanges work: Market takers and market makers.\" width=\"1000\" height=\"722\" /></p>\n<p>Of course, as you can imagine, usually things aren’t as simple as that. For example, you might be trading with a <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-liquidity-pool/">liquidity pool</strong></a> of the crypto exchange, instead of an actual person on the other end. Furthermore, I won’t even get into the details of advanced trading features, such as <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-leverage/">leveraged or <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-margin-trading/">margin trading</strong></a> - that’s a whole, separate section.</p>\n<h2>CEXs and DEXs</h2>\n<p>Up to this point, we’ve exclusively talked about what are known as <strong>centralized, or custodial exchanges</strong>. These are cryptocurrency exchange platforms that have a company behind them, and that allow you to keep your crypto on their platforms.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How do cryptocurrency exchanges work: CEXs and DEXs.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_are_crypto_exchanges_05.o.jpg/" alt=\"How do cryptocurrency exchanges work: CEXs and DEXs.\" width=\"1000\" height=\"734\" /></p>\n<p>However, there’s another popular form of exchanges, as well - those of a decentralized nature.</p>\n<p>Now, I won’t go too in-depth into <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-decentralized-exchange-dex/">DEXs, and how they work, since it’s quite a hefty and complicated topic, in of its own.</p>\n<p>As far as this section is concerned, though, you should know that <strong>DEXs offer peer-to-peer trading, and don’t hold any of your cryptocurrencies</strong>. Such exchanges preserve the anonymity and privacy of their users, however, they are also considered to be quite complicated, in addition to placing the entirety of the cryptocurrency management and wallet creation process on you - the user. So, as you study what is a decentralized cryptocurrency exchange, just keep in mind that, if something were to go wrong, there would be <strong>no customer support</strong> to reach out to - that can be scary!</p>\n<p>While decentralized exchanges are a really cool concept, if you’re just starting out, <strong>it’s best to stick to the popular, established platforms</strong>. With them creating a wallet for you, and allowing you to store your crypto with them, it’s a far more beginner-friendly approach. On top of that, the traditional buyer-seller matching available with centralized exchanges is much simpler to understand, if you’re just trying to figure out how cryptocurrency exchanges work!</p>","preview_url":"https://www.bitdegree.org/crypto/learn/how-do-cryptocurrency-exchanges-work","youtube_video":{"id":128,"channel_id":1,"sort":22,"video_title":"How do Cryptocurrency Exchanges Work? (Easily Explained!)","description":"Wondering how do cryptocurrency exchanges work?\n\nTrading and exchanging crypto has become a pretty common process - it seems like everyone is doing it these days, no matter if you’re an industry veteran, or a newcomer! However, have you ever thought about what is a crypto exchange, and how do crypto exchanges work, to begin with?\n\nIn this video, I will tell you all about it. We’ll look into the history of crypto exchanges, in general, and I will then tell you about what happens when you first register on an exchange, buy your initial crypto, and start trading. Additionally, we will also touch on the differences between centralized and decentralized exchanges, too!\n\nDo you have a favorite crypto exchange that you use? 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Terms","updated":false,"chapter":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters/crypto-101-glossary.jpg","chapter_simple":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters-simple/crypto-glossary-101.jpg","rating":100,"sections":["A","B","C","D","E","F","G","H","I","J","K","L","M","N","O","P","Q","R","S","T","U","V","W","X","Y","Z"]}],"currentChapter":"crypto-exchanges","currentSection":"how-do-cryptocurrency-exchanges-work","readingTime":9,"readingLevel":"easy"},"url":"/crypto/learn/how-do-cryptocurrency-exchanges-work","version":"cdd198d50cbe5c9c21c9329d7c096ffc"}" class="container-fluid d-flex crypto-book p-0"> Chapter 3: Crypto Exchanges
How do Cryptocurrency Exchanges Work?
Did you know that you can trade digital assets on cryptocurrency exchanges anytime you want? This includes daytime, nighttime, weekends, and holidays.
In this section, I will explain how do cryptocurrency exchanges work!
So - you’ve heard about cryptocurrencies, you are really excited to jump into this industry, and you are looking for a great way to start your crypto journey by buying some coins and tokens for yourself. Naturally, your very first instinct would be to visit a crypto exchange!
However, as you go to register on a select exchange platform of your choice, you catch yourself wondering - how do cryptocurrency exchanges work, really? Is there, like, a person who takes care of all of your orders? What about some of the additional features of exchanges, such as crypto storage and user data collection? Well, that’s what we’ll talk about, today!
In this section, we are going to talk about cryptocurrency exchanges, and how they work. Specifically, I’ll tell you about the history of crypto exchange platforms, how these exchanges store your crypto and facilitate trades, as well as a bit about the different types of exchanges that you might come across, too!
Without further ado, let’s get to it!
Video Explainer
Video Explainer: How do Cryptocurrency Exchanges Work?
Reading is not your thing? Watch the "How do Cryptocurrency Exchanges Work?" video explainer
The History of Cryptocurrency Exchange Platforms
To start things off, let’s first look into what is a crypto exchange, as well as the general history of crypto exchanges, shall we? Don’t worry - I won’t bore you with the technical details, and we’ll only focus on the bigger picture!
Truth be told, cryptocurrency exchanges have a pretty exciting, yet also often rocky history. Today, it’s really difficult to track the very first exchange - if there’s one thing for certain, though, it’s the fact that the first few exchanges that came around after the creation of Bitcoin back in 2009 were very basic, in their design. All you could really do was trade BTC - admittedly, that was arguably all the market needed, back in those days!
As time went on, the number of cryptocurrencies grew, exponentially - this is especially true after Ethereum launched, and brought smart contracts to the world of crypto. With all of these new coins and tokens, exchanges needed to keep up, as well - slowly but surely, some of the top exchange platforms in the industry started introducing new features to their clients. Now, you could not only trade crypto, but also buy it with fiat money, lend and borrow coins & tokens, stake your favorite assets, and so on.
Essentially, it seems that with every new wave of crypto technology (such as NFTs, DeFi, crypto gaming, and so on), there come new features available on crypto exchanges, as well. This is really good, since it means that exchanges are “keeping up” with the trends, and catering to their clients’ wants and needs.
While all of that sounds like sunshine and rainbows, the reality, however, is quite different. Historically speaking, there have been countless instances when exchanges got hacked, and the funds kept on them got stolen, never to be seen again. If you were to keep your crypto on such an exchange, you’d likely lose the entirety of your portfolio!
Anyone learning about what is a crypto exchange should also look into one of the most legendary of such instances that happened in 2011, with the infamous Mt. Gox crypto exchange. While it’s a story that requires a separate section, in of its own, the short version is that, over the period of a few years, huge amounts of Bitcoin were being stolen from the exchange’s hot wallet, in addition to users having their data leaked to malicious third-party data harvesters. Today, Mt. Gox is still seen as one of the most notorious instances of crypto hacking, and has become a sort of a legend among crypto enthusiasts worldwide.
All of those things - both the good, as well as the bad ones - bring us to the present date. Today, there are a few world-famous exchanges on the market, as well as hundreds of alternatives. For example, probably the biggest crypto exchange in the world is Binance - a platform that houses a huge variety of different features and services, and acts as a sort of a crypto hub. So, each platform strives to be better than its competitors, when it comes to offering their users the ability to interact with their crypto in as many different ways as possible.
Truth be told, many present-day exchanges can now be considered crypto hubs, due to the sheer variety of features that they offer!
How Do Cryptocurrency Exchanges Work?
Now that you know a bit about the history behind crypto exchange platforms, let’s continue by focusing on the core question at hand - how do cryptocurrency exchanges work?
For this, I’ll need you to use your imagination, since we’re going to go through a few examples.
For starters, imagine that you’re a newbie investor, and are looking to buy your very first Bitcoin. You decide to go with a popular exchange platform, such as the aforementioned Binance.
The very first thing that you’ll need to do is register on the exchange, and provide it with proof of your identity. In this regard, crypto exchanges act as any other financial institution - they need to identify you, as a means to prevent any fraud, money laundering, and other shady activities that malicious people might think of doing.
Once you pass all of the identification processes, you will now be permitted to buy your very first crypto. Since this is 2022 and not 2010, most exchanges - Binance included - will allow you to use a fiat payment method, such as a credit or debit card.
Think of it as if you were to go and purchase ice cream from a vendor at the beach. You choose which ice cream it is that you want, pay for it with an accepted payment method (perhaps the ice cream vendor only accepts cash?), and that’s it - you can enjoy your fozen treat. Buying crypto these days is really that simple!
All that you need to do is pick the cryptocurrency that you’d like to buy (such as Bitcoin), add a payment method, and enter the amount of money that you wish to spend. In just a few seconds, your exchange account will be credited with your newly-acquired BTC!
Now, where does all of that Bitcoin go, you might ask? Well, this is a big part of understanding how do cryptocurrency exchanges work - the crypto exchange will create an account for you, specific to that cryptocurrency that you’ve bought. Your account will be distinguished by a public wallet address (some people call it a public key - that’s not entirely correct, but ya, it still refers to the same thing, in this context).
So, instead of you having to go out and “create” a wallet account for yourself, the exchange that you are using will create one for you. Also, that address will be specific to the crypto asset that you’ve bought - this is true for most cryptocurrencies. That’s because, as you might know, most cryptocurrencies are based on their own networks, and can’t really communicate with one another directly - thus, they can’t be stored on the same wallet, either!
If all of that sounds really complicated to you, make sure to check out other sections in our Crypto 101 Handbook. You’ll be able to find all of the concepts that I’ve just mentioned - crypto wallets, different blockchains, and so on - explained in detail. However, let me still give you an example, to illustrate my point.
Imagine that you’ve decided to fill your car up with some fuel. You pull up to the gas station, and instinctively start filling your car’s tank up with petrol. After all, it’s a petrol car! Nearby, you notice a few charging stations, for electric vehicles.
Now, can you charge up your petrol car at an electric station? No, of course not! That’s because petrol cars are completely different from electric ones, even though both of them are still vehicles that serve the same general purposes.
The same is true with cryptocurrencies, too - they can’t be stored in a single wallet, since they are based on completely different networks. However, in the car example, there are both petrol pumps and electric charging stations available in the same gas station. This is equivalent to a cryptocurrency exchange housing multiple different wallets, on the same, single client’s account!
Haha, I admit - these are some of the more-advanced concepts to wrap your head around! However, it’s still at the core of the services that cryptocurrency exchanges provide.
Once you have your Bitcoin, the next thing that you might want to do is trade it - once again, that’s a service that you will find available on all exchanges. In this regard, trading works very similarly to how it does with stocks - you have the market makers (people who create an order, or buy) and takers (people who will fill out that order, or sell). The exchange’s mission is to match these two people with one another, and fulfill the order!
Of course, as you can imagine, usually things aren’t as simple as that. For example, you might be trading with a liquidity pool of the crypto exchange, instead of an actual person on the other end. Furthermore, I won’t even get into the details of advanced trading features, such as leveraged or margin trading - that’s a whole, separate section.
CEXs and DEXs
Up to this point, we’ve exclusively talked about what are known as centralized, or custodial exchanges. These are cryptocurrency exchange platforms that have a company behind them, and that allow you to keep your crypto on their platforms.
However, there’s another popular form of exchanges, as well - those of a decentralized nature.
Now, I won’t go too in-depth into DEXs, and how they work, since it’s quite a hefty and complicated topic, in of its own.
As far as this section is concerned, though, you should know that DEXs offer peer-to-peer trading, and don’t hold any of your cryptocurrencies. Such exchanges preserve the anonymity and privacy of their users, however, they are also considered to be quite complicated, in addition to placing the entirety of the cryptocurrency management and wallet creation process on you - the user. So, as you study what is a decentralized cryptocurrency exchange, just keep in mind that, if something were to go wrong, there would be no customer support to reach out to - that can be scary!
While decentralized exchanges are a really cool concept, if you’re just starting out, it’s best to stick to the popular, established platforms. With them creating a wallet for you, and allowing you to store your crypto with them, it’s a far more beginner-friendly approach. On top of that, the traditional buyer-seller matching available with centralized exchanges is much simpler to understand, if you’re just trying to figure out how cryptocurrency exchanges work!
