Cryptocurrencies – What is a DEX

DEXs, or decentralized exchanges, are the unique fruit of blockchains. Unlike CEXs, they do not use third parties, or intermediaries, to conduct transactions.

What is a DEX

You could say that a DEX is a kind of application based on the blockchain it is embedded in. They perform largely the same functions as a CEX

Their purpose is to perform transactions for their users. These transactions are made directly with other users, and because they do not need intermediaries, they use smart contracts.

Unlike CEXs, DEXs are not custodial, that is, the user maintains control of his keys.

How it works

Although they have existed for almost 10 years, it was only 3 / 4 years ago that they began to gain greater popularity. This is thanks to Uniswap, the first DEX considered an automated market maker or AMM.

Previously, DEXs tried to replicate CEXs. But they also replicated their problems: lack of liquidity and slow execution. Hence the importance of this new way of executing trades.

AMMs have used so-called “liquidity pools”, or liquidity pools, where the capital of users who want to participate is deposited. The incentive to participate is the sharing of fees charged to DEX users who want to execute some kind of transaction.

In essence, the user is the bank offering liquidity to other users to perform currency conversions, receiving a fraction of the fee charged.

Unlike CEX, which uses an order book, AMMs use smart contracts to determine the exchange price and use funds from liquidity pools to automatically execute orders.

Advantages

  • Privacy – Unlike CEX, DEX does not require any information from users in order to be enjoyed/executed. The lack of regulation allows their users anonymity.
  • Security – As mentioned earlier, in DEXs the user keeps his assets in his possession at all times, so there is less risk of private keys being stolen. They are also a less likely target for hacking since the funds are not aggregated in a single wallet as in CEX, but in the individual wallets of each user.
  • Low cost – Thanks to automatic execution through smart contracts, costs are typically lower than a CEX and can fluctuate with demand.
  • Diversity – CEX, as they have to obey certain rules and regulations, has to meet requirements before adding a token or cryptocurrency to their list. As a result, they may take longer, or even not add certain assets at all, preventing their clients from being able to trade those assets. Since there is no such regulation on DEX, their users can usually access new projects first.

Disadvantages

  • Difficult to use – Probably the biggest and first obstacle that users will face is using the DEX itself. They usually have confusing designs, and need to use external wallets, and connect correctly. It usually takes some learning, but there have been improvements recently.
  • Scams/scams – Although one of the advantages is faster access to certain projects, there is always the possibility that the project is a scam, better known as rug pull.
  • Smart contracts – We have already mentioned this in other articles, but there is always the possibility that smart contracts have some kind of vulnerability that is still unsolved and can be exploited.

Conclusion

DEX is a process inspired by CEX’s, which has only recently distinguished itself through the adoption of an automated market maker, AMM model based on “liquidity pools”. This transition has created an enormous advantage for user autonomy and access, but ideally requires more in-depth knowledge, since being the user’s responsibility to manage their assets, they will always be subject to validate conversions, gains and screen for what may be scams/scams.

DEXs are another step in the evolution of the blockchain ecosystem.

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