On this week’s episode of Ask Doctor Bitcoin, we talk about exchanges—where you go when you want to exchange one currency for another kind of currency. We’ll specifically cover centralized and decentralized exchanges.
A cryptocurrency exchange is a place for you to take your money and turn it into other kinds of money. In a cryptocurrency transaction, one person initiates the transaction (which makes a record on the ledger), and the other person accepts the transaction (also making a record on the ledger).
In a centralized exchange, instead of the transaction going from initiator to blockchain to receiver, the initiator sends the transaction to a centralized platform to exchange the currency. For example, the initiator may send bitcoin (via the blockchain) to the centralized platform, which then converts the currency to Ether and records it on the Ethereum blockchain—which the initiator then reads. This process is the antithesis of blockchain technology, because with a centralized platform, you now have a central point of failure and are vulnerable to hackers.
In a decentralized exchange, you are making the transaction by yourself, using smart contracts to broker the process. For example, the initiator sends his bitcoin to a smart contract owned by a decentralized exchange and transfers it to Ether. If the transaction is not completed, the money is sent back to the initiator safely and securely.
Mark shows users how to make a transaction using ShapeShift. In the example, he transfers Dash to Ether using the decentralized platform. Remember to fill in your sender address, so in the event that the transaction does not complete, your money will be returned. Choose the amount you want to exchange, type in the receiving address, and scan the QR code. The example transaction was completed in less than a minute. Changelly works similarly but has a diverse set of currencies it accesses. Both exchanges are decentralized, accessible through website or apps, and are equally secure and recommended for making cryptocurrency exchanges.
For more information on cryptocurrency and for all of your questions, join us each week on Ask Doctor Bitcoin.