DEX, is a decentralized exchange, which appeared in the world of cryptocurrencies some time ago. Definitely different from centralized exchanges (CEX). Today we will tell you how they work, what they are characterized by and whether it is worth using them. We invite you to read!
DEX decentralized exchange – definition
Decentralized Exchange, abbreviated DEX. It is a decentralized cryptocurrency exchange that, as the name suggests, operates without the involvement of third parties. Trading using cryptocurrencies takes place directly between interested investors, i.e. in mode peer-to-peer.
DEX-y are nothing but applications that rely on blockchain. They enable and coordinate large-scale trading of digital assets. Everything is done using automated algorithms.
They do not use intermediaries between the seller and the buyer. Algorithms that are used in DEXs are smart contracts that trigger “exits” upon receiving certain “outputs”.
The idea of decentralized exchanges is simple. They want to eliminate the intermediaries between transactions so that users do business directly with each other. Using this kind of DEX exchange, you don’t have to transfer your assets to it. Everything is securely located on users’ wallets, which further increases their security. Using DEX also prevents price manipulation and counterfeiting of trades. Trading in this market is simple and user-friendly.
There’s no denying that DEX-y are the biggest decentralized applications. They usually operate on a conventional basis in stock exchange books. What does it mean? Based on the ledger, buyers, and sellers are matched against each other based on data such as order prices and volume. We all know that full decentralization is the key to success when it comes to the industry of cryptocurrencies.
Each DEX is more advanced than CEX. Why? If only because of the privacy that DEXs provide on a large scale. User wallets, balances, and transactions are private and safe in this asset market. What’s more, making transactions between investor A and investor B in decentralized exchanges gives us a sense of greater individuality and independence.
As we have already mentioned, DEXs are managed with smart contracts (then they are said to be fully automated) or with the involvement of programmers and the community (then we mention semi-automated exchange).
Decentralized exchanges match requests to buy/sell digital assets. Moreover, some DEXs allow staking and farming.
DEX vs CEX
We already found out what they are, decentralized exchanges (DEX). It is worth highlighting the basic differences between them and centralized exchanges (CEX).
- CEX, is a traditional exchange that has its board of directors and keeps user data confidential.
- The algorithms used to operate CEX store the trading history of the exchange, users, and control its work.
- DEXs have no governing body. They are fully automatic or semi-automatic.
- DEXs are based on automatic market creation protocol. Thanks to this, the price of a given asset is determined using an algorithmic write function. CEXs use historical transaction data of their users for this analysis and pricing. The CEX exchange is entirely different from the traditional and well-known cryptocurrency exchange.
- In decentralized exchanges, they require the minimum steps you need to take to trade them.
- In the case of CEXs, you must go through the entire registration process and verify your identity.
- When trading on decentralized applications, the whole process is done in peer-to-peer mode. And they pay for the transaction.
- Speaking of differences, it is also worth looking at the commissions offered by these exchanges. In the case of DEX, its height is dynamic and largely depends on the amount of traffic on the blockchain. There are also no intermediaries between them, so the commission is lower than in the case of centralized exchanges.
Advantages and disadvantages of DEX exchanges
| Benefits | Defects |
| They ensure complete anonymity. KYC registration and authentication is not required. | They do not have a security deposit, which in turn limits their functionality. |
| We do not store our funds on DEXs, which is why they are completely safe. In the event of a hacker attack or even a collapse of the stock exchange, you risk nothing. | The liquidity pool is definitely smaller than in the case of CEXs. |
| A hacker attack is virtually impossible. Why? Because DEXs operate on a distributed ledger. | We have no technical support in case of error or our mistake. |
| No governing body. |
Are DEXs really completely safe?
No doubt, their popularity has increased thanks to anonymity and full decentralization. However, when we take a closer look at them, they really are decentralized exchanges that have a shadow of centralization. We are talking here, even about oracles, smart contracts or so-called administrator keys. It is true that the use of smart contracts gives users of decentralized applications full control over their funds. Thanks to this, the risk of theft or loss of funds is minimal.
The best DEXs
Uniswap – One of the most popular decentralised exchanges, built on the Ethereum blockchain, using smart contracts. Since the introduction of the Uniswap V3 protocol in 2020, the platform has offered more advanced features such as liquidity concentration, allowing liquidity providers to manage their capital more precisely. Uniswap has also expanded to other networks such as Polygon and BNB Chain, increasing its accessibility and scope.
PancakeSwap – This is a BNB Chain-based DEX that operates under an automated market maker (AMM) model, meaning that trades take place against liquidity pools rather than a traditional order book. PancakeSwap has become one of the leading DEXs, particularly in the Binance ecosystem. It also offers features such as staking, yield farming and lotteries, making it a versatile platform for users.
SushiSwap – Initially built as a fork of Uniswap, SushiSwap has quickly evolved to offer users additional features. In addition to trading digital assets, the platform offers tools such as staking, yield farming, as well as new financial products, such as SushiBar (SUSHI staking) and BentoBox, which enable efficient capital management and the generation of passive profits.
1inch – This is an aggregation protocol that searches various DEXs for the best deals for users. With this tool, users can get optimal prices in the cryptocurrency market. 1inch supports multiple blockchains, including Ethereum, BNB Chain, Polygon and Optimism, making it one of the most popular DEX aggregators on the market.
Curve Finance – Focuses on stablecoins and offers a platform for users who prefer lower risk. Curve is known for optimising stablecoin exchanges, minimising slippage (price slippage) and offering higher returns to liquidity providers through dedicated pools for stablecoin. Over time, Curve has also expanded its business by introducing products such as Curve DAO and CRV token, which enhance users’ ability to manage and generate returns.
Summary
You already know the basic differences between DEX exchanges and CEX. If you value security and anonymity, trading with decentralized applications is a better choice for you. However, remember that DEX-y are not regulated in any way – neither legally nor physically.
