What is a decentralized exchange?

What is a DEX?

Decentralized exchanges (called DEXes) are markets where transactions are made directly between users (peer-to-peer) unlike centralized exchanges with an intermediary. 

This article gives an introduction to what DEXes are and how to use them. 

How do DEXs work?

Unlike a centralized exchange like Binance, a decentralized exchange is simply a set of smart contracts. They set the prices of various cryptocurrencies and use ‘ liquidity pools ‘, where investors block funds in exchange for rewards, to facilitate transactions. 

Although transactions on a centralized exchange are recorded in an internal database, transactions on a DEX are settled directly on the blockchain. DEXs are largely open-source . This means that anyone who is interested can see the code on which that exchange works. Sushiswap, Pancakeswap and Uniswap are types of DEXes. 

Benefits of Using a DEX

• DEXs offer an almost unlimited range of tokens: from the most well-known to the strangest and totally random. This is because anyone can create a token and create a liquidity pool for it, so you will find a wider range of projects, both vetted and non-vetted.
• Data Security: No personal information is required to use the most popular DEXs.
• Financial Openness: Peer-to-peer lending, fast transactions, and the self-custody achieved by DEXs have made them increasingly popular in all crypto markets. 

Risks of Using a DEX

• First, a more complex UX. Navigating the interfaces of decentralized exchanges requires some experience, and the interfaces are not always easy. Caution is required as it is possible to make an unrecoverable error such as sending coins to the wrong wallet. 
• Also, smart contracts can be vulnerable. Any DeFi protocol is only as secure as the smart contracts that power it, and the code can have exploitable bugs. 

Get Started

Every DEX will instruct new users how to connect their wallet and begin using the interface. Fees between different DEXes will vary, but users should understand how their DEX works before making lots of asset swaps.