Decentralized Exchange (DEX)

What Is A Decentralized Exchange (DEX)?

A decentralized exchange (DEX) is a sort of cryptocurrency exchange that enables direct peer-to-peer cryptocurrency transactions to take place online safely and without the use of an intermediary or brokers.

Deeper Definition

Explained, decentralized exchanges (DEXs) allow consumers to purchase and sell cryptocurrencies without the assistance of intermediaries.

A blockchain or distributed ledger replaces the conventional third-party entities that would ordinarily control asset security and transfer (e.g., banks, stockbrokers, online payment gateways, government agencies, etc.) in transactions done through decentralized exchanges. Some typical means of functioning include smart contracts or order book relaying, while many additional variations and degrees of decentralization are available.

Decentralized exchanges lessen the danger of theft from exchange hacking. Traders on a decentralized exchange frequently do not need to transmit their assets to the exchange before executing a deal. Still, liquidity providers do need to send tokens to the decentralized exchange. Decentralized exchanges are also more anonymous than exchanges that apply know your customer (KYC) rules. They prevent price manipulation or faked trade volume through wash trading.

There are some indications that low trade volumes and market liquidity have hampered decentralized exchanges. The 0x project, a mechanism for creating decentralized exchanges with interchangeable liquidity, aims to address this problem.

A decentralized exchange can nonetheless incorporate centralized components, allowing a central authority to retain some control over the exchange. One significant example is IDEX’s prohibition on New York State users making orders on the site.

Government regulators may pursue legal action against operators of decentralized exchanges. One example is the creator of EtherDelta, who resolved charges with the Securities and Exchange Commission in November 2018 for running an unregistered securities exchange.

Decentralized Exchange Example

Uniswap, constructed on the Ethereum blockchain, has the highest trade volume of any DEX. On May 5th, 2021, it released its V3 to the Ethereum mainnet. PancakeSwap, MDEX, Curve, 1inch, 0x Protocol are other examples (CRYPTO: CAKE). Furthermore, specific wallets, like TrustWallet, are DEXs with built-in features, so the swaps may be performed from inside the wallet rather than connecting to a platform.