What is a decentralized exchange (DEX)?


A decentralized exchange allows you to use an external wallet to carry out the trading.

What is a decentralized exchange (DEX)?
A decentralized exchange is yet another use case of blockchain technology. It offers Peer-to-Peer (P2P) trading of crypto assets. The most important advantage of a decentralized exchange is that it can offer a trading facility in virtually all the coins available. There are more than 5000 coins in circulation right now. Many of these coins are in infancy and they don’t have high trading volume – an important consideration for centralized exchanges to choose an asset to list for trading.
A decentralized exchange is a crypto exchange that offers almost all and similar trading services that a centralized exchange can offer. However, it is different from centralized exchanges and is considered by some to be the trading exchange of the future. At the moment, decentralized exchanges account for about 5 percent of the crypto trade.
Unlike centralized exchanges, DEXs are based on smart contracts that make most of the processes follow automatically. Among the major advantages of this system is that it can interact with products and services such as the DeFi based on smart contracts.
What DEX is not?
DEX is not the custodian of your funds or the private keys.
How is DEX a better choice?
A centralized exchange is a complex system where all the buyers and sellers come together to buy and sell their digital assets. All of them maintain their respective crypto wallets offered by the exchange and use them to carry out transactions. It not only brings sensitive information to one place and makes them vulnerable to hacking and stealing but also creates a monolithic structure.
In contrast, a DEX makes things easy for everyone. It can accommodate all possible coins even those that have little trading volume without adding to its cost of operations. DEXs work on blockchain networks which are mostly open source. New blockchain networks such as Cardano and Solana offer much higher capacity, speed, and scalability at low transaction costs. These new realities make DEX a highly attractive trading platform.
Here are a few other advantages of DEX:
You remain in control of your money
In a traditional stock exchange, you need a ‘trading account’ to store the funds for buying the stocks or to receive the funds when you sell the stocks. In centralized crypto exchanges, the trading account is an e-wallet offered by the exchange. Given the cyber-security risks, holding an e-wallet on a centralized exchange is full of counterparty risks.
A decentralized exchange is distinguished by the absence of an e-wallet offered by the exchange to facilitate the transactions.
A DEX doesn’t ask you to transfer your funds to a wallet or trading account to carry out trading transactions. In this case, you stay in control of your funds and it’s an important feature for a crypto platform, which is vulnerable to hacking and thefts.
It’s safe and secure
A centralized exchange gathers important and sensitive information as part of its routine operation. For example, you use a private key to operate your e-wallet for every transaction. The details of your private key get registered and stored on the exchange’s servers.
A decentralized exchange allows you to use an external wallet to carry out the trading. Here, the details of your private key are not registered on the exchange’s servers giving you full control over your wallet and funds.
It’s cheaper
Usually, a decentralized exchange is cheaper than a centralized exchange that has to bear additional costs in setting up and maintaining infrastructure to offer dedicated and secure wallet services to the customers. The use of smart contracts makes many of the complicated processes on the exchange automated and self-regulated.
A decentralized exchange leverages the network on which it operates to offer cost-efficient services. Now, new blockchain networks have come up with higher efficiency, capacity, and price competitiveness. Decentralized exchanges using these networks may offer much-reduced transaction cost to their customers.
Summing up
The most defining feature of blockchain technology is the idea of distributed and decentralized decision-making. A transaction of a crypto asset is peer to peer (P2P) and requires confirmation of other members on the network. So, in the space of blockchain technology, decentralized exchanges (DEXs) are something very natural and have a huge potential.