DEX is short for decentralized exchange, a cryptocurrency trading platform not maintained by a centralized company. Instead, the whole thing runs on code and only accepts cryptocurrencies.
Unlike centralized exchanges, such as Coinbase, decentralized exchanges are non-custodial; trades come directly from user-controlled cryptocurrency wallets and funds are not stored on the exchange. Trades are processed entirely on-chain, and secured and recorded by blockchain rather than on a large corporate database.
Many DEXes are, at least in theory, community-owned. This means they are overseen by those who hold DEX-specific governance tokens, who hold votes on how to run the protocol. Plus, because they’re permissionless, anyone can list anything. Anything goes—even blatant scams.
DEXes primarily work in one of two ways. The first is to replicate the order books of centralized exchanges, which match buyers with sellers. This is how the DEXes called IDEX and Serum work.
The second is through an automated market maker (AMM), whereby the DEX’s algorithm helps users trade in and out of huge pools of cryptocurrency pairings provided by other users. AMMs are by far the most popular type of DEX, with Uniswap and Curve making the lion’s share of decentralized trades.
Despite supporting the industry ethos of decentralization, centralized exchanges (CEXes) remain king. It’s not hard to understand why. DEXes are built on blockchains susceptible to network congestion, which can make trades prohibitively expensive due to high gas fees.
And while CEXes let users trade Bitcoin for Ethereum, DEXes are specific to a single blockchain, so only tokens on that blockchain can be traded. (It’s a chore to trade across chains). Plus, lacking the coordination to secure the correct money licenses, DEXes only accept cryptocurrencies.
These pools—based on pure code—are also at risk of technical exploits, leading to loss of user funds. And if the token balances in these pools change dramatically, as is often the case, users may also end up with less money than they have put in. Despite these risks and uncertainties, some view DEXes as an important new technological innovation for the world of trading.
Go deeper:
Networked liquidity—Radar Relay
See also:
What is Ethereum?
What is DeFi?
What are exchanges?
Try it:
Uniswap—a popular decentralized exchange
Curve—a popular decentralized exchange for stablecoin trading