Everything about decentralized exchanges (DEXs)

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Everything about decentralized exchanges (DEXs)

Things to know before commenting on this guide:

No prior knowledge required

To define what a decentralized exchange (DEX) is, by definition, we have to contrast it with a centralized exchange (CEX). Though their purpose is the same and the functions similar, there are, nevertheless, major differences between the two types of websites. 

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  • A top decentralized exchang
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Whether it is a desire for anonymity, financial interest or simple philosophy, more traders are gradually turning to decentralized platforms to carry out their trades and exchanges.

In this guide, we explore the term “decentralized exchange” in detail.

We cover what they are, how they’re used and other key differences between DEXs and CEXs. You will read about the advantages and disadvantages of DEXs to better compare them with central exchanges.

What Is a Decentralized Exchange?

A Better Look at DEX Platforms

A decentralized crypto exchange is where investors trade crypto.

What makes one truly decentral is that it isn’t managed by any intermediary. Not one company or organization is used to complete your transactions. Unlike centralized exchanges, DEXs are built on top of public blockchains, which allow users to maintain ownership and control of their crypto.

As for DEXs, they’re valued for maintaining transparency, security and censorship for all users involved.

Indeed, these features stand out because DEXs have neither a central server nor a single point of control that they’re governed by. A decentralized crypto exchange uses smart contracts to manage its transactions between different users of its web platform.

Decentralized exchanges give traders more control over their privacy. Most DEXs offer greater security over a users’ personal data. You won’t have to provide personal data in order to register or transact on a DEX.

Everything is automated via smart contracts, which are effective algorithms that execute when very specific conditions are met within your transactions.

The absence of a central intermediary is a key selling point of decentralized exchanges. 

How Does a DEX Work?

In an effort to remain autonomous, decentralized exchanges heavily rely on smart contracts.

Understanding the DEX Framework

These programs are executed automatically, directly on the blockchain when one or more conditions are met and without human intervention. Smart contracts execute the buy and sell orders of cryptocurrency traders.

In theory, you need a crypto wallet to use a DEX. 

Your wallet must be compatible with the blockchain that your crypto exchange was built on.

Today, some DEXs use multiple blockchains as some crypto wallets do. This service option keeps you in possession of your crypto without you entrusting them to a third party.

Only once your wallet is connected can you then place buy and sell orders accordingly.

Your orders get executed via smart contracts as we just explained above. At the moment a transaction is made, the assets are transferred directly from one wallet to another.

The Advantages of DEXs

Here’s a look at the key advantages of using top decentralized exchanges

  • Security—DEXs offer more security than CEXs since they do not store user funds. As a result, funds are less likely to be targeted by an attack.
  • Transparency—The use of public blockchains offers complete visibility of each transaction. Each user can therefore locate their own transactions on a blockchain.
  • Confidentiality—DEXs do not require any personal data from their users, unlike CEXs. 
  • Censorship resistance—There is no control point or even a central server on DEXs. Decentralized exchanges cannot, therefore, be controlled by a single authority.

A DEX offers an alternative that’s more secure and transparent than CEXs.

The Disadvantages of DEXs

Check out these common disadvantages of a decentralized exchange: 

  • Complexity—DEXs are a little more complex than centralized platforms. They require prior knowledge that not all users will have.
  • Liquidity limits—Generally speaking, DEXs have less liquidity than most CEXs—with some exceptions. Some orders take longer to execute and prices can be less attractive.
  • Fees—Although not a universal truth, most DEXs have higher transaction fees.
  • Volatility—Prices are a bit more volatile on DEXs than on CEXs. Overall, asset prices are impacted more significantly due to common market movements.
  • Lack of customer service—DEXs almost never have customer service departments. You will have to turn to an active crypto community for help.

Different Types of Decentralized Exchanges Today

Making DEX Platforms Work for You

t’s wrong to believe that there is only one type of decentralized exchange.

At present, there are three types of DEXs to choose from. Your options, ultimately, offer relatively similar services. Some DEXs don’t have blockchains, are either hybrids or use a single, specific blockchain.

We’ll also talk about the best decentral exchanges and a list of decentralized exchanges.

DEXs Without Blockchain

These decentralized exchanges allow users to exchange tokens without going through a specific blockchain. Unlike blockchain-based DEXs, these use a peer-to-peer network to execute orders and initiate trades.

On a classic DEX, smart contracts fulfill that role.

On this type of exchange, it is possible to carry out peer-to-peer exchanges from a crypto wallet or a crypto trading application. Orders are then executed using decentralized communication protocols, which allow users to trade without an intermediary.

Blockchain-free DEXs offer ideal privacy since your transaction data won’t be stored on any blockchain. However, some limitations, in terms of liquidity and volume, may arise without the present innovation of blockchain. O

ne of the most known non-blockchain DEXs is Bisq. 

Bisq is a decentralized exchange without a blockchain. Users can buy or sell crypto along with fiat currencies, having “anonymity” offered as a service option for users on the platform.

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The Hybrid DEX

Another option is the hybrid DEX. This exchange class combines both blockchain and off-chain protocols. Unlike those using a blockchain, hybrids use relays to execute orders and not smart contracts.

Hybrids are faster and cheaper, using, still, the security benefits of blockchain.

On a hybrid exchange, users send and receive funds from their crypto wallet. 

Once an order is placed, the funds are sent to an off-chain relay, which is outside of the blockchain, for each transaction to process. Relays use complex algorithms to execute trades.

Each order gets sent to a blockchain to be finalized. Once there, smart contracts will take over.

There are several advantages to using hybrid DEXs, including transaction speed and low transaction costs. The most well-known hybrid DEX is Loopring. This uses the Ethereum blockchain to guarantee the security and transparency of its users.

Blockchain DEXs

The most used decentralized exchanges are powered by blockchains. 

Uniswap is a typical example that comes to mind. This type of DEX uses blockchain to secure its transactions with smart contracts to carry out buy and sell orders. There, traders can also exchange assets with other people directly on the blockchain.

The orders get sent directly from a trader’s crypto wallet. Transactions are then executed through smart contracts. Though crypto is popular, native tokens and NFTs are also managed through the network of a blockchain-powered DEX.

There are many advantages to using blockchain-based DEXs. 

They offer security and transparency, including more freedom in controlling personal funds. Cyber attacks are also less likely due to a blockchain protecting user accounts.

A Last Word On Decentralized Exchanges

Profiting From DEX Exchanges

Decentralized exchanges are alternatives to CEXs. At the core, DEXs operate on public blockchains and smart contracts. Be it transparency, security, confidentiality or autonomy, you’ll find more of these through a DEX site.

Overall, DEX users maintain control of their private assets and won’t need to provide personal data when using platform services.

Keep in mind that DEXs are transparent, allowing you to track transactions that get stored via blockchain. Although DEXs are still not yet widespread, their popularity only grows. 

This growth comes at a time when anonymity is at the heart of our public debates.

At the same time, many political powers still denounce these platforms in an effort to fight against money laundering, tax evasion and the financing of illegal crime organizations.

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Frequently Asked Questions

What is a decentralized platform?

Also called DEX, a decentralized platform is a platform that allows direct transactions between users without the need for a trusted third party.

What is the best DEX?

There is no best DEX? However, several DEXs stand out for their popularity and trading volume. We will therefore retain Uniswap, SushiSwap, and PancakeSwap as major players in decentralized exchanges.

How does a decentralized exchange work?

Depending on the type of DEX, the mode of operation will be different. Generally speaking, a DEX will allow users to exchange funds without any intermediaries. In our guide, we introduce you to the 3 types of DEX and how they work.

Which platforms are decentralized?

The most popular decentralized platforms are Uniswap, PancakeSwap and SushiSwap. We can also mention 1inch, Curve, Balancer, Bisq and Loopring.

Who facilitates a trade on DEX?

Smart contracts make it easier to trade on DEXs. These operate in the same way as a program which executes when one or more defined conditions are met.

How to use Binance DEX?

In order to use Binance DEX, you will first need to create an account and then configure your BNB Chain compatible crypto wallet. Subsequently, you will be able to access the platform and start using its services.

About the author

Joseph Minor

In seeing a digital world explode, Joseph invested his writing in the field of technology over 8 years ago. As a leading-content creator, he believes in clarity, credibility and writing topics people want to read. From blockchain to Web3.0, Joseph sees no shortage of developments as crypto pushes forward. He’s become a voice in technology that people can trust and look forward to hearing more from.