Decentralized exchanges explained

Decentralized exchanges, explained Logo



DEXs are an important part of DeFi, so let’s take a look at what they are and how they work.

What is a DEX?

A decentralized exchange, or DEX, enables cryptocurrency trading directly between users, without the need for an intermediary.

Unlike a centralized exchange, a DEX uses smart contracts and algorithms as the central authority, relying on the trustless nature of open-source code to reliably execute trades.

How does a DEX work?

Most DEXs use an Automated Market Maker (AMM) design. They use liquidity pools that allow traders to swap tokens, instead of waiting for a specific order to match and execute.

Liquidity pools are complex, but the most important thing to know is that they allow for simple, fast trading of tokens within a DEX.

Benefits of using a DEX

There are several reasons why using a DEX is rather appealing.

  • Privacy and control
    DEXs allow users to retain privacy, without having to go through a formal KYC process.
    Trading on a DEX is done using smart contracts, liquidity pools and AMMs, which means no central authority manually validating and processing transactions.
  • Low fees
    Thanks to smart contracts, DEXs are able to offer much lower fees for transactions (and are often faster) than a centralized exchange.
  • Open source
    Having open-source code means that anyone can verify the processes and rules that the DEX and its smart contracts will follow.

Limitations of using a DEX

While a DEX offers many features that a centralized exchange does not, there are some criticisms of DEXs.

  • Lack of user support
  • Challenging interface
  • Lower liquidity
  • Crypto only

Does a DEX make sense?

DEXes are an important part of DeFi, and offer some unique tools that might not be found in centralized or TradFi exchanges.

Your account allows you to have both custodial and non-custodial wallets in the same place, and you can use your Private Key Wallet address to connect to DEXs through WalletConnect.

You can learn how to do that in this video tutorial.

William P. Eason

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