Crypt. Crypto. Cryptic. Cryptography. Cryptologist. Cryptocurrency.
That’s the evolution of working and messaging people with secrets and codes. The word “Crypt” has a greek root meaning, hidden or secret.
This form of encoding cryptics in messages has been in practice for the longest time. Well, another practice that has stood the test of time is barter trading. And we know what the latest barter system feels like… it feels like $ or ₹ or £. Yup! Money!
These days it’s not just digital and virtual money, but wallets too! From PayPal to PayTM having dollars or rupees, to Metamask having ETH and Ronin having USDC and Axie Infinity.
Cryptocurrency and crypto trading is the revolution in trade, business, and finance.
What’s a Cryptocurrency?
Cryptocurrency is a virtual currency with secure encryption present in transactions and purchases. The transactions get recorded in a secure decentralized web3 technology known as a blockchain.
Many blocks contain transaction details and connect through encryption.
The blockchain is a decentralized medium to store transactions of various cryptocurrencies. But wait, how many cryptocurrencies are present in the market?
Well, there are Bitcoin, Ethereum, Cardano, and Binance coins to name a few of the popular ones. But to quantify, there are almost 50+ tokens of cryptocurrency value.
MANA and SAND are tokens that have value in their native blockchain where you can buy land in the metaverse.
Some of the common cryptocurrencies are
- Bitcoin [BTC]
- Ethereum [ETH]
- Polygon [MATIC]
- Brave [BAT]
- Decentraland [MANA]
- Sandbox NFT Token [SAND]
- Arweave [AR]
- Uniswap [UNI]
- Chainlink [LINK]
- Enjin [ENJ]
Where Can You Get Cryptocurrencies?
At the Cryptocurrency exchanges of course!
A cryptocurrency exchange is a peer-to-peer community. In a decentralized exchange, transactions of cryptocurrencies and virtual assets like NFTs occur. Within a DEX, one can trade traditional currency (dinars, francs, pesos, rupees, dhiram, etc.) for cryptocurrency.
Some cryptocurrencies get mined too! Blockchains such as Bitcoin and Ethereum provide tokens as rewards for mining and validating the blockchain. Brave, the web browser, rewards users with Brave Attention Tokens.
The 3 Types Of Exchanges:
These crypto token exchange forums deal with three main types of exchanges:
- Traditional currency to Cryptocurrency / Crypto token.
Anyone can buy a crypto token or a cryptocurrency at the decentral forex.
One buys the encrypted token for a value listed in the forum that alternates and varies as to how stock markets value different conversions.
So if 1 ETH costs $100, one can buy 1 ETH for $100. 1 ADA from Cardano can cost ₹25/ – only at the time of writing. So, an Indian could easily own 8 ADA tokens with just ₹200/-
- Between 2 cryptocurrencies/crypto tokens.
One can trade between 2 different cryptocurrencies or crypto tokens. The exchange between these also occurs similarly to how traditional currencies get exchanged at the market. Every token has a value relative to another.
Now, if I have ADA and ETH, I need Axie Infinity tokens to play the game. But, if I cannot afford to spend money, then I can trade it for some ETH.
At the time of writing, 1 AXS = 21.95 ADA, so nevermind that… I’ll probably spend 0.00544 ETH instead.
And finally,
- NFTs for Crypto tokens/ coins or cryptocurrencies.
You can buy NFTs as assets in a trade for crypto tokens. So that 1st 5000 days NFT? All yours for 33.75 ETH or the CR7 collection when it comes out!
Nonetheless, if you want your cryptocurrencies to stop inflating due to their volatile nature, trade them for a stablecoin. Stablecoins have a stable value with the traditional currency market. So inflation doesn’t harm your financial portfolio.
How Does A Decentralized Exchange Work?
Discipline? A set of rules and regulations? Command lines and Smart Contracts?
Well, you’re close enough. Smart Contracts rule the execution with the forum but some other tools and protocols follow to ensure smooth working within the exchange.
A DEX runs mainly by five things:
- Order Book
- Liquidity Pool
- Automated Market Maker
- Smart Contracts
- Blockchain
The Order Book
An order book is an online list of requests or posts that many users have posted. This serves as a reference to all the transactions that occur on the exchange platform. Here one can find a list of orders or requests, and you can easily start a transaction with them.
You can see who wants what asset in exchange, and you can conduct the swap between them. Alternatively, if you don’t find any requests that match your criteria, you can post now with the details necessary.
You can trade in your digital assets, your NFTs, and your crypto tokens too. The conversion or the exchange between crypto tokens occurs as per the crypto market.
The Liquidity Pool
The liquidity pool is where investors lock their money away for safekeeping. The money kept safe gains interest over time.
The Automated Market Maker
The automated market maker provides cryptocurrency for exchange without a middleman/ intermediate.
AMMs utilize Smart Contracts and incentives for liquidity provision to automate cryptocurrency trading. Thus, eliminating the need for an intermediate and making the forum suitable and secure to operate as a DEX.
The Function of Smart Contracts
Smart Contracts are the heart and soul of the entire system. The contracts are autonomous pieces of code that self-execute upon meeting some criteria as written on the command line.
The contracts ensure the exchange occurs smoothly between the two concerned parties.
Further, the AMMs incentivized the creation of liquidity pools such that they get traded as per an algorithm within the program. The incentives come from the fee that users pay to trade.
So, if you trade a certain amount, you pay the transaction fee. This transaction fee is then received as interest/incentive upon the liquidity pool you’ve contributed to.
So, you’ve posted an order in the order book, your liquidity pool gains incentives due to the AMM, and the transactions occur smoothly in the ecosystem due to Smart Contracts. But where are they getting stored or recorded? On the Blockchains.
The Blockchain
All transactions and transfers of digital assets and cryptocurrency occur in the blockchain. Most of the DEXs are built on certain blockchains like Ethereum.
Blockchains store information of the concerned parties and the transfer or exchange details. These are verified by an attorney of nodes or validators.
Most of your DEXs are open-source code that is transparent for all coders and Web3 developers to refer to. If they believe they need to make a vital change or introduce a tool; they are free to do so. In addition, Web3 developers can in turn make a novel project with the existing code too.
Summary
A cryptocurrency is a version of digital money, a token at its best is often used for digital transactions and purchases. There are many cryptocurrencies that are present in the market.
One can get a crypto token at a decentralized exchange. Known as DEX in short, decentralized exchanges deal with allowing persons to buy a digital token, exchange them for other tokens, and sometimes allow one to buy an NFT in exchange for the token.
A decentralized exchange works with 5 components – the Order Book, Liquidity Pool, AMM, Smart Contracts, and a blockchain. Together they run the DEX in an autonomous, smooth manner that’s not just easy but secure too.
