DEX are exchanges that do not require users to deposit money to start trading and do not hold the money for the user.
What is a DEX compared to the centralized system we are used to? Decentralized crypto exchanges (DEXs) are blockchain-based applications that coordinate large-scale crypto asset trading among many users. These applications use fully automated algorithms.
The algorithms used by DEXs are examples of smart contracts. They are pieces of code written on top of blockchain networks like Ethereum that trigger various outputs given certain inputs.
The main goal of a DEX is to “eliminate intermediaries”. On the other hand, a DEX does not offer custody of users’ crypto assets. Instead, users always keep all their assets directly in their own wallets.
According to a report by KPMG, the largest crypto DEXs were set to challenge some of the largest centralized exchanges (CEXs) in terms of trading volume by late 2021. Just as exchanges are the largest crypto firms, DEXs are the largest decentralized entities.
Typically, DEXs eliminate traditional foreign exchange order books in favor of “liquidity pools”. These are crypto assets that sit beneath the exchange’s surface, waiting to clear any buy or sell orders that arise. The assets in the pool originate from investors who deposit them to earn a return on the transaction fees charged to pool users.
The largest DEX is Uniswap, created by a former mechanical engineer. By late 2021, it was processing more than $1 billion in transactions every day.
By February 2022, Uniswap’s version 3 protocol was managing about $2 billion in transaction volume on some days, according to CoinGecko data. It manages about three times the volume of its closest DEX competitors, such as PancakeSwap, which typically manages between $300 million and $600 million in daily volume. Now you know the answer to the question, what is DEX? Now we can move on to other details.
Venice Swap is the developer of a leading non-custodial, decentralized exchange with a mission to build open, secure, and powerful financial products. Venice Swap runs on smart contracts controlled on Ethereum, eliminating the need to rely on a centralized exchange when trading. The exchange combines the security and transparency of a decentralized exchange with the speed and availability of a centralized exchange.
The Uniswap Protocol is an open-source protocol for providing liquidity and trading ERC20 tokens on Ethereum and is not upgradeable. Designed to be hack-resistant, it offers secure, accessible, and efficient swaps.
PancakeSwap is a decentralized exchange (DEX) for exchanging BEP20 tokens on Binance Smart Chain. It uses a model called automated market maker (AMM) where users trade against a liquidity pool. The pools are filled with users’ funds. Individuals receive liquidity provider tokens in return. They can use these tokens to redeem their shares and part of the transaction fees.
Are DEXs reliable?
Now that we’ve answered the question “What is a DEX?” and learned about DEX exchanges, we can move on to the most important part: security.
You start on a traditional cryptocurrency exchange by creating an account and fulfilling the site’s Know Your Customer (KYC) requirements. After making a deposit or linking your existing crypto wallet, you can buy, sell, and trade cryptocurrencies, making a quick trade or building a long-term portfolio.
On a decentralized crypto exchange, you connect your cryptocurrency wallet to the software running on the DEX website. If you want to buy or trade crypto assets, you simply specify what you’re looking for. The decentralized exchange app tells you the price and if you confirm, you complete the transaction. You never log in, give a name or email address, or create an account.
DEXs are brokerages that connect crypto buyers to pools of crypto funds available for purchase. As mentioned above, in a simple sense, you don’t need to see any personal information to use any DEX.
In fact, therefore DEXs allow you to trade more easily than centralized exchanges. But as the industry evolves, risks increase, and scams proliferate.
Since both CEXs and DEXs have their advantages and disadvantages, choosing a crypto exchange is very important. Here are some things to consider before making this choice:
- Willingness to share KYC information
- Token availability
- Comfort level in sharing access to your digital assets