What Is A Crypto Decentralized Exchange (DEX)? How Do These Exchanges Work?

While centralized crypto exchanges (CEX) have dominated the crypto scene since their inception, decentralized exchanges (DEX) have also emerged with recent controversies and questionable security mechanisms surrounding CEX implementations.

Read this article to understand how decentralized exchanges work, what makes them unique, and learn about some of the DEX platforms in the crypto space.

What is a decentralized exchange (DEX)?

Decentralized exchanges are peer-to-peer marketplaces where transactions are initiated and completed without any intermediaries between cryptocurrency traders.

DX platforms are based on the real topic of cryptocurrencies, decentralized , as they do not require central management and the participants process their own requests/transactions. Please note that these exchanges rely on automated market maker protocols to match cryptocurrency prices with standard exchange rates.

How does DEX work? What are its main features?

From a technical perspective, DEX is a set of modern contracts that support cryptocurrency exchanges. As mentioned earlier, these platforms use automatic algorithms to capture cryptocurrency prices and facilitate all trading through “liquidity pools”.

Unlike centralized platforms, DEXs cannot support cryptocurrency exchanges due to the lack of an "order book". All DEX transactions are verified directly on the blockchain.

Furthermore, these unique exchanges do not include user accounts, KYC verification requirements or other similar regulatory checks as per the full standards with CEX. A decentralized exchange of this type without storage requires users to link their cold or hot wallets to it. Once joined, participants can anonymously trade cryptocurrencies held in wallets to access dApps or other DeFi projects from a decentralized exchange.

Simply put, when you transact on DEX platforms, you still control your cryptographic keys, despite their "untrusted and unsolvable" structure.

Another interesting point is that DEX is developed as an open source that anyone can access. This is why many decentralized exchanges have emerged based on the existing DX project code.

Some advantages of decentralized exchanges

Here are some important advantages of decentralized exchanges

1. Safety

DEX platforms are linked to external wallets, which means that only wallet holders can access their private keys (crypto) and DEX is not responsible for their funds. In other words, cryptocurrency is not stored on decentralized exchanges, as it only serves as a platform to facilitate transactions.

As a result, DEXs exhibit relatively low vulnerability to “hacking” and “collateral default risk”.

2. Anonymity

Anonymity is an important feature of DEXs, as users do not need to provide personal information to trade on them.

3. Different currencies

Do you want to buy some not very well known cryptocurrency that is still in its infancy? If so, DEX might be for you.

A central exchange catalog of several hundred highly liquid coins that meet security and legal standards. On the other hand, a wide range of decentralized exchanges expand virtual coins, from completely unknown and exotic coins to common coins. This is because anyone can list the token, even though the listed coins show very low trading volume.

4. Low fees

Since DEXs are essentially smart contracts and do not require a broker, they charge relatively lower fees than centralized options.

Disadvantages of decentralized exchanges

DEX platforms also have some drawbacks that you should be aware of.

1. Low fluids

Since DEXs include different currencies, this leads to market fragmentation and generally low liquidity.

2. It's not very convenient

Decentralized exchanges may not be suitable for beginners due to their complex interface and system. Users must first understand how to use external wallets, configure them, fund the wallet with fiat currency or cryptocurrency, and finally connect to DEX.

The process of investing money and buying cryptocurrency on centralized exchanges is very simple.

3. It depends on the original smart contract

DEXs are basically a DeFi protocol, so they are just as secure as smart contracts. Any problem with the code may result in the loss of tokens.

4. Size matters

Decentralized exchanges run on the blockchain. Therefore, its flexibility and functionality are related to the underlying network.

Top 3 decentralized exchanges

If you want to take advantage of decentralized exchanges, here are three of the most popular DEXs out of many.

1. UniSwap

Founded in 2018, Uniswap is an Ethereum-based decentralized exchange that is fully compatible with all ERC-20 tokens and wallets such as MetaMask. Like all DEXs, Uniswap has no control over the users' funds, as the participants themselves are responsible for the private keys. Moreover, it is an open source platform where anyone can master the codes for free.

Decentralized financial exchanges this month recorded the highest trading volume they haven't seen in 20 weeks, according to data from Coingecko. As of November 19, UniSwap had $55.2 billion in total DEX volume of $91.2 billion.

2.1 in

1inch is a DEX aggregator platform that searches for the best cryptocurrency prices across multiple decentralized exchanges and expands the most profitable way of trading for users.

This Ethereum-based protocol solves the lack of liquidity on decentralized exchanges by pooling liquidity from multiple DEXs. At the same time, 1 inch allows traders to stay afloat and deal with better prices than those offered on many platforms.

Also, like all DEXs, there is no fee charged for transferring or exchanging 1-inch cryptocurrencies.

3. Exchange of pies

Created in 2020, PancakeSwap is a popular DEX platform built on the Binance Smart Chain. This exchange is based on Uniswap v2 and has some similarities with the latter, for example, traders can exchange their coins with others without intermediaries.

Like other DEXs, PancakeSwap includes an Automated Market Maker (AMM) system where participants trade in liquid pools. In addition, the protocol allows cryptocurrency holders to use many leading features such as equity and profitability. Please note that PancakeSwap requires a BNB Chain compatible wallet to connect to PancakeSwap.

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