Crypto Glossary

Decentralized Exchange (DEX)

A decentralized exchange (or DEX, for short) is a new type of exchange that is part of the growing world of decentralized finance.

Most exchanges are centralized. They are owned and operated by a single company that provides the platform and infrastructure. When you hold coins in your wallets on these exchanges, these are hosted wallets. That company holds the private keys to your wallet. This is most similar to a traditional bank, where you trust that the bank will look after your funds on your behalf and you don’t have to think about the security of it (for the most part).

Now, there are issues with centralized exchanges. For instance:

  • They hold the keys to your funds. While a regulated exchange is very unlikely to mess with them, it isn’t impossible. Plus, there’s always the risk that the exchange is hacked in some way.
  • They have the right to deny service. In other words, it is not truly a permissionless system. There are many exchanges, for instance, where certain countries are exempted from being able to use it for regulatory reasons.
  • Centralized exchanges are subject to regulation. For instance, regulated exchanges here in the US are subject to reporting requirements of AML and KYC rules and some people just don’t like that.

The whole, original point of blockchain was to be decentralized. To not require permission. Our entire traditional financial system is permission based. If the crypto world was entirely permission-based, it loses a major part of it’s value proposition.

This is why DeFi developed… and why the decentralized exchange was invented.

This is a kind of exchange that enables peer-to-peer crypto transactions to take place, without permission and without the need for an intermediary. This is like a public exchange marketplace where crypto holders can exchange funds, but there is no central company or group that controls that platform or marketplace.

Unlike a centralized exchange, a decentralized exchange never holds your crypto. You never have to transfer funds from your own wallet to a middleman. Instead, the system uses a token-based system that handles the transaction directly. Whoever is “buying” your crypto from you on the DEX, you don’t need to know or trust them whatsoever. This is a trustless system that will reliably execute the transaction without you knowing who is on the other end and where you don’t ever need to give up control of your funds until the transaction is processed.

DEX is a new technology. While it has several things that give it the advantage over a centralized exchange, a well-established centralized exchange will usually provide much better liquidity, as well as fancier options such as margin trading, limit orders, etc. Also, centralized exchanges are easier to use. Currently, using a DEX is a geekier experience and can be a little confusing.

At this time, the most popular DEX is Uniswap.

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