What is a Decentralized Exchange (DEX)?
A Decentralized Exchange, also known as a DEX is a peer-to-peer marketplace which allows users/traders to trade assets between themselves, without the need for any third parties.
Banks, payment processors, brokers and the entire financial industry will change and reshape itself around decentralized finance. Decentralized Exchanges utilize the ultimate power of Smart Contracts, providing power to the people. Without DEXs, DeFi would cease to exist, so it is important to understand what a Decentralized Exchange is, how they work and how you can utilise them to your advantage.
How does a Decentralised Exchange (DEX) work?
Firstly, there are 3 types of DEXs: AMMs, Aggregators & Order Book DEXs. The easiest way to explain it is to take an example. In our case, let’s choose Uniswap. Uniswap uses what’s called an AMM Model, aka the Automated Market Maker.
When a user wants to swap an asset on the DEX, let’s say $ETH - $USDC. The transaction will be sent through to the smart contract, which guarantees the finality of your transaction, securely! Where does the money come from? Simple answer, Liquidity pools!
AMM (Automated Market Maker) DEXs
An AMM stands for Automated Market Maker and is a variation of a Decentralized Exchange (DEX) that allows users to trade/swap crypto or any other asset on the blockchain without third parties or any centralized entities getting involved!
In essence, Automated Market Maker DEXs are just a collection of smart contracts where users can deposit crypto to provide liquidity and create liquidity pools (LPs). AMMs use and include mathematical formulas or oracles that can set the price accurately for each cryptocurrency.
Order Book DEXs
Order Books for Centralized and Decentralized Exchanges work differently than expected. Centralized Exchange Order Books are controlled by the CEX itself, whereas in a DEX, the Order Books are maintained by the users who create the orders themselves, meaning pure decentralization, through and through.
Simply explained, a decentralized order book is a list of all the buy/sell orders of a specific cryptocurrency trading pair. All of the orders remain within the Order Book until a trade has been performed.
DEX Aggregators
One of DeFi’s best and most simple innovations is the introduction of DEX aggregators. Aggregators will gather liquidity from a variety of different Decentralized Exchanges which allows users to find the best possible prices for any trade they are looking for.
DEX Aggregators are especially great for users who trade crypto frequently. As mentioned, they can find the best possible prices, while also minimising the slippage and the associated trading fees!
Conclusion
Decentralized Exchanges are a necessity for every blockchain and that is why we have an expansive list of DEX Tutorials on our YouTube channel.
Generally speaking, most DeFi wallets such as Metamask, Phantom and Trust Wallet have the built-in swapping feature. Beware however that these wallets may not have the best rates and you may find yourself spending more on fees due to the convenience of swapping directly through your wallet.
