Decentralised exchange (DEX) is a platform that facilitates online transactions of cryptocurrency trading without intermediaries.
Similarly to a stock exchange, DEX allows traders to buy and sell assets. Yet while the former is centralised, DEX operates as a peer-to-peer marketplace where transactions take place directly between the owners of cryptocurrencies.
DEX is an essential component of cryptocurrency transactions as they allow blockchains or secured ledgers to take over the responsibility of ensuring secure trades, instead of a central system of bank, stock brokers and government.
One of the examples of decentralised exchange is Uniswap, an exchange that runs on the Ethereum-based blockchain protocol to carry out peer-to-peer trading.
History of Decentralised Exchange
With bitcoin having been created in 2008, there appeared a need to develop an exchange platform for people to trade cryptocurrencies. Although Central Exchanges (CEXs) were facilitating these transactions, they became easy targets for hackers.
By 2014, open-source cryptocurrency and payment network NXT launched the NXT Asset Exchange, one of the first decentralised exchanges.
How does decentralised exchanges work?
The framework of a decentralised exchange is based on smart contracts. Using liquidity pools they allow token holders to lock their cryptocurrency into DEX to facilitate trade orders, and also earn returns through locking their funds in these pools.
When trading on a DEX, crypto traders essentially interact with smart contracts that are built on the blockchain ecosystem.
Types of DEX
Broadly, there are three types of decentralised exchanges which are Order Book DEXs, Automated Market Makers and DEX Aggregators.
Automated Market Makers (AMM) make use of smart contracts to facilitate the working of a DEX platform. Smart contracts operate on the basis of liquidity pools, which are pre-funded pools of assets.
Crypto traders can provide funding to the liquidity pools and get rewards, usually in the form of cryptocurrency. By making use of smart contract and pre-set mathematical equations, Automated Market Making ensures the selling side matches the buying side. Some popular examples of AMM DEXs are Uniswap and Sushi.
Order book DEXs
Order Book DEXs are more traditional types of DEX. Under this system, a record of all open orders for trading different pairs of assets is maintained. The buy and sell orders suggest a trader’s intent to bid for and sell different assets at a particular price. These bid and ask prices are effectively matched on the Order Book DEX.
These are further categorised into on-chain and off-chain order books. On-chain keeps its information on chain and allows for traders to leverage their positions by using funds from lenders on their platform. Examples of order book DEXs include Stellar and Bitshares. Off-chain store order books enable transaction settlement on the blockchain. Examples include IDEX and EtherDelta.
DEX aggregators
DEX aggregators are trading protocols that channel liquidity from multiple DEXs based on specified requirements. They aren’t dependent solely on traders’ liquidity pools and can raise liquidity efficiently through different avenues. For example, Ox and Matcha.
Are Decentralised Exchanges safe?
Decentralised exchanges eliminate counterparty risks, which means there’s less fear that the other trading party will not fulfil its part of the deal. Owing to smart contracts and complete removal of intermediaries, DEX platform users can safely trade without fearing a default from the counterparty.
However, smart contracts aren’t necessarily fully proofed against slippages. There’s always a chance for bugs to exploit secure contracts, which may cause loss of tokens.
Definition. A decentralized exchange (or DEX) is a peer-to-peer marketplace where transactions occur directly between crypto traders. DEXs fulfill one of crypto's core possibilities: fostering financial transactions that aren't officiated by banks, brokers, or any other intermediary.
While DEXs aren't subject to KYC/AML regulations right now, many think they will be eventually since crypto exchanges are now regulated. Even if DEXs aren't subject to KYC/AML regulations in the short term, embracing the key tenets of KYC compliance can benefit the space.
CEXs and DEXs are both platforms that help buyers and sellers trade. While a CEX is operated by a single entity, a DEX is run permissionlessly through smart contracts on a blockchain. An entity or project may help set up and maintain a DEX, but it can run itself as long as people provide liquidity.
DeFi vs Dex. DeFi and DEX are like two peas in a pod. DeFi provides the foundation for a decentralized financial system, while DEXs serve as vibrant marketplaces where users can trade their digital assets in a secure and peer-to-peer manner.
Centralized Exchange (CEX) A centralized exchange is a traditional cryptocurrency exchange operated by a centralized organization. These platforms act as intermediaries, matching buyers and sellers. Example of such exchange includes Binance, OKX, KuCoin, LBank, BitGet, etc.
Global Access - DEXs are accessible to anyone with an internet connection, regardless of where they are located. Cons: Liquidity - DEXs generally have lower liquidity than centralized exchanges, which can result in slower trade execution and higher transaction fees.
DEXes, in general, are trying to catch up with CEX's efficiency in matching and executing orders. But the top DEXes have good enough liquidity and market depth for the major coins, and in fact, DEX's liquidity is more accurate and traceable.
Unlike centralized exchanges like Coinbase, DEXs don't allow for exchanges between fiat and crypto — instead, they exclusively trade cryptocurrency tokens for other cryptocurrency tokens.
Users interact with DEXs by connecting their non-custodial wallets, e.g. Metamask, TrustWallet, MyEtherWallet to name a few. All transactions are on blockchain which makes DEX services fully transparent. Even though DEXs represent the very foundation of crypto space, they don't attract as many users as CEXs.
A centralized exchange operates as a digital marketplace where users can trade cryptocurrencies. A central authority, similar to traditional stock exchanges, manages these exchanges. Examples of popular CEXs include Binance, Coinbase, and Kraken.
Uniswap is a great option for investors who are new to using decentralized exchanges. Uniswap is the world's most popular decentralized exchange and has a very easy-to-use interface. Currently, decentralized exchanges do not report to the IRS.
Transaction Fee Revenue: Similar to centralized exchanges, DEXs earn revenue by charging transaction fees. However, DEXs typically offer lower fees due to the absence of intermediary costs, attracting a larger user base. These fees support the operational and developmental needs of the DEX.
As a refresher, MetaMask Swaps allows you to swap tokens directly from your desktop or mobile wallet, aggregating data from various decentralized exchanges (DEX) and market makers to ensure you get the best price at the lowest network fees.
Disadvantages of a Decentralised Crypto Exchange (DEX)
Limited Functionality and Ease of Use. Unlike the powerful and feature-rich dashboards of centralised exchanges, decentralised ones tend to be far more limited in functionality and even ease of use. ...
Coinbase Wallet – Popular decentralized wallet that connects to the popular Coinbase exchange. Crypto.com DeFi Wallet – Crypto wallet with staking and support for dApps, and NFTs. Uniswap Wallet – Secure decentralized wallet with seamless connection to one of the largest DEXs.
Hacking risks can be reduced: Because all of the funds in a DEX trade are stored on the traders' own wallets, they are theoretically less susceptible to a hack.
Can I trade fiat currency on a DEX? Most DEXs primarily support cryptocurrency-to-cryptocurrency trading pairs. To trade with fiat currency, you'll typically need to go through a centralized exchange or a peer-to-peer platform to convert your fiat to cryptocurrency first.
DEXs are more anonymous compared to traditional cryptocurrency exchanges because of the way they operate. In traditional exchanges, users typically need to complete a rigorous registration process, including providing personal data and verifying their identity through the KYC process.
Navigate to the Trade tab on your Coinbase account.Search for and select the cryptocurrency that you want to trade and select Trade on DEX.Follow the prompts to complete your purchase or swap.
Introduction: My name is Dr. Pierre Goyette, I am a enchanting, powerful, jolly, rich, graceful, colorful, zany person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
