Thread by @SouravInsights

The crypto boom is taking off like crazy! Everybody now wants to own digital money. People are using Exchanges/P2P to buy them. However, exchanges are currently the most popular choice for many! So it's high time we talk about them & understand "How they Work" in this 🧵 #thread!

Table of Contents: 📝
▪️What's an #exchange & how it works?
▪️Who are #MarketMakers & why we need them?
▪️What's #liquidity & why it matters?
▪️Types of Exchanges:
- Centralized Exchanges #CEX
- Decentralized Exchanges #DEX

#Retweet if you like the content! Let's get started! 🚀

What's an #Exchange?
It's just a platform that matches #buyers & #sellers. They say what price, they are willing to buy/sell any particular asset, the exchange matches these 2 orders & the trade happens. The price at which the trade got executed becomes the "Last Traded Price".

A common #misconception is that prices are set by exchanges! It's not true! Exchanges just matches buyers & sellers. Prices are mostly set by #supply & #demand. When demand is high prices rise & the vice versa. I've talked about this in the below thread!👇

https://twitter.com/SouravInsights/status/1382246509261901828

When an asset is bought/sold, there must be someone on the other end of the transaction. To buy 10 #ETH, we must find someone who wants to sell 10 ETH. But, it's unlikely that we will immediately find someone who wants to sell 10 ETH. This is where "#MarketMakers" comes in.

#MarketMakers are always ready to buy or sell! When we want to sell 10 #ETH, a market maker is always ready to purchase it from us, even if it doesn't have a seller lined up. Without them, it would take considerably longer for #traders to be matched with one another.

If an exchange doesn't have Market Makers, it reduces the #liquidity of the platform, making it more difficult to #enter or #exit positions and adding to the costs and risks of #trading.

Let's talk about #liquidity & why it matters? It represents how easy it is to convert any asset to cash/another asset. High liquidity indicates a #stable market where trades can happen quickly & in fair prices. The higher the liquidity the better it is for #exchanges & #traders!

Key takeaways: 🔑
1. Market makers provide #liquidity by being always ready to buy/sell assets at any time.
2. Without market makers, far #fewer trades would happen & market become #unstable
3. Market makers #profit on the difference between the bid & ask prices on their trades.

We have mainly 2 types of #Exchanges:
1. Centralized Exchanges (#CEX)
2. Decentralized Exchanges (#DEX)

Let's talk about them a bit... 👇

#CentralizedExchanges are just like traditional stock exchanges where people buy & sell assets. It maintains an 'order book' to execute trades for users of the exchange. Think of order books as just a list of the currently open buy & sell orders for an asset, organized by price.

On a centralized exchange, #buyers and #sellers offer up different prices for an asset. When other users find a listed price to be acceptable, they execute a #trade and that price becomes the asset’s market price.

In a Centralized Exchange, our #funds remain in their #custody. Meaning the #private key 🔑 of our wallets are never exposed to us. They do this because an individual might lose hundreds of thousands of dollars of crypto holdings simply by forgetting the key to a wallet. 🤐

Some popular Centralized Exchanges include companies like @binance, @coinbase, @WazirXIndia etc. We will talk about "how to get started" with them in my upcoming thread! 🧵
So stay tuned! 😬

On the other hand, #DEXes don't have any custody & have zero control over our funds! With a DEX, we #trade directly from our own wallet like @MetaMask or anything else! Some popular DEX are @Uniswap @BalancerLabs @dydxprotocol.. We will talk more on them in a different thread!🤞

But with power comes responsibility! As DEXes don't manage your #keys, you are solely responsible for the safety of your own keys! Another downside is #gas cost is too hot right now & not quite profitable for small players. Also, #liquidity is kinda something to be careful of!

However, DEXes are gaining popularity over time and smart people who are getting into this rabbit hole are making insane profits by #liquiditymining, #yieldfarming etc. Again, we will talk more about them in a different thread! 🙂

Hope you got some ideas! We'll talk more on 'how to get started' in the coming #thread! 🤞

Finally, follow me @SouravInsights for more threads about #crypto, #DeFi, and #DEX!

If you want to help me spread this knowledge, please RT the first tweet 😁

Have a nice day! ❤️