What Is a Decentralized Exchange (DEX)?
As indicated by the name, DEX is a digital platform that you can use to exchange cryptocurrency without requiring the approval or regulation from a central, mediating party. DEX is based on the blockchain technology and uses the smart contracts to complete its functions.
You may know that any P2P swapping can take the form of a decentralized exchange or trade. However, when talking about DEX, we’re primarily interested in the exchange platforms whose backend exist entirely on blockchains unlike centralized exchanges.
How does DEX work?
There are many similarities between the DEX and their centralized counterparts but there are basic functional differences too that make them distinct in many ways according to different types of DEX available to users. Some of them are:
- On-chain order books
- Off-chain order books
- Automated Market Makers (AMM)
Advantages of DEXs
- Privacy and no KYC
KYC and AML are acronyms for Know Your Customer and Anti-Money Laundering. These are compliance rules that you have to follow for many exchanges. For many reasons, you’ll have to submit these documentations for identity and address proof. It can easily become a concern of privacy and accessibility for others to comply to rules like this. Everyone is wary of their information leaking out or not having the required official documents all the time. DEX on the other hand don’t require any documentation, validation or permissions. No third-party checks your background or identity. All you need to have is a crypto wallet.
- No third-party security risk
One of the best things about the decentralized exchanges is that these cryptocurrencies don’t hold on to their customer’s funds. This means that even in case of high-end attacks like the 2014 Mt. Gox catastrophe and other hacking incidents, your money and personal information is not at risk of exposure.
- Unlisted tokens
There are lots of tokens that don’t get listed on the centralized cryptocurrency exchanges but they can still be traded freely on a DEX network, if they have a good supply and demand balance.
Disadvantages of DEXs
Despite all their advantages, DEX platforms aren’t that well organized or user-friendly like centralized networks, which provide real-time trades. CEXs are more friendly for the newcomers and beginners. For instance, if you forget your CEX password, you reset it but you lose the seed phrase, you end up losing the funds forever.
- Trade volumes
Trade volume on DEX dwarfs in comparison to that of the CEXs. Apart from that there are huge differences between the liquidities of both platforms. Liquidity simply means the accessibility or ease of trading an asset at a reasonable price. Therefore, liquid markets are more likely to have high competition and reasonable markets. DEX networks are still quite small so even if you own assets there and wish to trade them, you won’t always find an interested party or get a fair price.
DEX fees are quite reasonable. However, in case you’re using on-chain books or the network you’re on is congested, you can face higher DEX fees.