Swap Tracker
June Katz 15 Mar 2020 ◦ 4 min read

What Is DEX?

What Is DEX?

The world of cryptocurrency mainly operates on centralized exchanges, which manage accounts and funds of their users functioning as intermediary institutions. Many people are not willing to share their personal information and rely on exchanges’ security systems. That’s when DEXes join the game. Let’s dig a little deeper to understand what it is and how it works.

Decentralized exchange explained

Currently, all major popular cryptocurrency exchanges, Coinbase, for example, are based on a centralized system. This means that they collect and store information about their users, and you should rely on their security system in order to keep your personal data and assets safe. To get away from this centralized institution, DEX was created. DEX is an innovative type of exchange platform that allows people to make transactions without any mediators. They can place orders and find each other, controlling everything on their own. To understand DEXs better, we will look into two concepts: custody and centralization. The custodial system means that if you buy cryptocurrency, it only appears in your account, but to own it you need to transfer it to your external wallet, which may result to be a difficult task if there are problems with the exchange. If you use a non-custodial system, all your assets go to your wallet and you can trade directly from it. And yet you may lose your assets if there are issues with the contract. As for centralization, it has to deal with the place where all the major stages of transactions happen, starting with order matching and ending with execution. Centralized exchanges have a special order book that logs all the orders and matches users. The transaction itself is held by the exchange software and servers. Decentralized exchanges work on a network of computers, they can either operate directly using smart contracts, or they can use relayers (second-layer networks). Now let’s consider the advantages and disadvantages of DEXs.

Benefits of decentralized exchanges

One of the main advantages of decentralized cryptocurrency exchange is anonymity. To join a decentralized exchange, you only need to use your public address, while centralized exchanges require a huge amount of data from their users. Another advantage is control: one can control their funds on their own and be responsible for their security. Moreover, due to decentralization DEXes are more difficult to hack. This leads to another benefit – less probability of a DEX having serious technical issues. Some nodes may go down, but the whole system will keep functioning.

Any drawbacks?

Since DEXes operate on a whole network of computers, it’s much more complicated to develop and implement. Entering a centralized exchange is quite an easy thing to do, while creating a DEX account involves connecting to a decentralized app (DApp) or in some cases installing a DEX client. Besides, in comparison with centralized exchanges, a DEX offers a simpler range of trading tools, which usually include only buying and selling. Moreover, the liquidity of such exchanges is really low, as only one percent of trading volume occurs on DEXes. Processing speed and fairness of trade are also important issues to mention. For now, even the best decentralized exchange takes a long time to process or cancel transactions, which results in price slipping. Apart from that, DEXes unintentionally make room for front-running, so you can’t be sure that no-one jumped ahead of you to buy coins. The main paradox of DEXes is the fact that some exchanges still hold custody of their users’ coins, some use order books or centralized networks of relayers. In this case are they really DEX and what’s their point?

Major DEXes

While the biggest part of trade volume is represented by centralized systems, there are still a few DEXes. IDEX and EtherDelta, for example, claim to be in the list of the most established DEXes. Both systems operate on Ethereum tokens. Binance DEX works with a great variety of coins, as well as 0x. There’s also Bancor Network that provides an automatic price determination and recalculation. Each DEX confronts its own issues that are yet to be solved. There’s a lot of controversy about the creation of a decentralized crypto exchange. Some people suppose it’s the only way to make trade fair and safe, while others believe that the only solution is to create a single centralized entity to govern all the transactions. There’s also a suggestion of creating a hybrid of centralized and decentralized exchanges combining their benefits. For now, it is unclear who’s right and who’s wrong but we’ll see what happens.

Related posts

Solana’s price is set for a rewarding phase

Solana’s price is set for a rewarding phase

05 Dec 2024 ◦ 7 min read
Solana's recent price surge has caught the attention of investors and crypto enthusiasts alike. As of December 2024, SOL is trading around $225, with its market
SEC mulls approving Ethereum ETF options

SEC mulls approving Ethereum ETF options

04 Dec 2024 ◦ 4 min read
The SEC has officially introduced spot ETFs for Ethereum , the second-largest cryptocurrency by market value, and for their secur
Bitcoin price reached $97,000 landmark for the first time

Bitcoin price reached $97,000 landmark for the first time

29 Nov 2024 ◦ 7 min read
The price of Bitcoin approached the $100,000 mark for the first time in history - on the night of 23rd November it reached $99,850. Bitcoin’s value has been rising almost unstoppably following Donald Trump's victory in the US presidential election.
Could BONK's massive 1 trillion token burn spark a price rally

Could BONK's massive 1 trillion token burn spark a price rally

27 Nov 2024 ◦ 3 min read
BONK , a popular Solana -based memecoin is experiencing two token burns that are changing its path. The community is buzzing about what the future holds for it. This article will analyz

Recent posts

Solana’s price is set for a rewarding phase
SEC mulls approving Ethereum ETF options
Bitcoin price reached $97,000 landmark for the first time
Could BONK's massive 1 trillion token burn spark a price rally

BTC  to ETH : best rates

btc-icon
btc
0.1