What is a DEX? Decentralized Exchanges Explained – Part 1

So you’ve been doing some research on cryptocurrencies and blockchain technology and come across the acronym “DEX”.  What in the world is a decentralized exchange and how does it stack up to a centralized exchange? In this blog, brought to you by TokenMason we discuss what a DEX is, how it works and the benefits […]

So you’ve been doing some research on cryptocurrencies and blockchain technology and come across the acronym “DEX”.  What in the world is a decentralized exchange and how does it stack up to a centralized exchange? In this blog, brought to you by TokenMason we discuss what a DEX is, how it works and the benefits of using it.

Simply put, DEX stands for ‘Decentralized Exchange’ which is a type of exchange primarily for cryptocurrencies that utilize block chain properties to facilitate the trade. The trade is achieved via blockchain-based apps that coordinate large-scale trading of crypto assets between many users. They do that entirely through automated algorithms, instead of the conventional approach of acting as financial intermediary between buyers and sellers.

It’s very likely that you may be familiar with and have used centralised exchanges or ‘CEXs,’ such as Coinbase or Binance. These are the premier places where people go to purchase and trade cryptocurrencies. These exchanges come with a requirement to be identified, create an account, and send fiat to them

A DEX will allow you to buy or sell tokens, however unlike centralised alternatives, you aren’t required to trust the exchange or be required to send money to them to use the DEX. This peer-to-peer marketplace is where transactions occur directly amongst crypto traders. DEXs fulfill one of crypto’s foundation possibilities: fostering financial transactions that aren’t officiated by, brokers, banks, payment processors, or any other type of intermediary.

The most popular DEXs such as  Uniswap and Sushiswap utilize the Ethereum blockchain and are part of a growing suite of Decentralized (DeFi) tools, which make a large  range of financial services available directly from an appropriate crypto wallet. DEXs are booming — in the first quarter of 2021, $217 billion in transactions flowed through decentralized exchanges. As of April 2021, there were more than two million DeFi traders, a ten-fold increase from May 2020.

Decentralized exchanges can exist on multiple blockchains; however, the most prominent ones are built on the Ethereum. Instead of creating a log in account you can simply connect existing Ethereum wallets (Metamask) and immediately make trades. DEX’s began to grow in popularity during 2019 and 2021, with aggregate trading volumes now frequently exceeding $1billion USD per day.

Many cryptocurrencies are exclusively available to be bought and sold on decentralized exchanges, so it’s essential to understand how DEX’s work if you want to invest in existing new tokens prior to them becoming common knowledge!

 

How does a DEX work?

There are several types of DEX’s which all work based on remarkably similar principles. At their core most, most DEX’s are constructed with smart contracts which ensure that trades take place only at the confirmed price, and safely trade the assets involved in the between the seller and buyer.

Regardless of the type of DEX, a user would take the following steps if they wished to buy a token:

  1. Access a website that provides a front-end page for the DEX. Note that since the smart contracts run on the blockchain, it is technically possible for someone to link directly to them and trade without utilising a website, however, this requires detailed technical knowledge of the blockchain. Countless different front ends may also exist that access the same DEX.
  2. Connect your crypto wallet (whether Metamask or another web or mobile wallet)
  3. Select the token that you wish to sell/ buy
  4. Press the swap button, resulting in a signing transaction of some type, which outlines the worst-case price you’d be required to pay
  5. If successful, see the balance updates

What are the benefits of using a DEX?

Some of the key benefits of DEXs are:

  1. Range of available tokens. The range is larger than one would expect on a centralised exchange. With many newer tokens being first available on DEXs before being adopted by the larger centralised exchanges.
  • Security of assets. On a DEX you always keep total control of your assets, which are held in your own wallet in a self-custodially manner. This reduces significant risk and means that you are not required to trust another entity to hold and secure them for you
  • Reliability. Certain centralised exchanges are known to experience downtime by going offline during periods of high volatility – basically when you are most likely to want to trade!
  • Open and permissionless. As smart contracts and DEX protocols can be utilised by anyone, there are geographical barriers to users for anyone on earth! This also means should you wish would build a new blockchain-based application you can access this price data and trade via a DEXs seamlessly without first requiring anyone’s permission
  • Transparency. As all trades are re-enforced via blockchain-based protocols, it makes it impossible for exchange owners to allow shifty practices or trading by clients who do not have the sufficient available funds to complete those trades. This leads to a more equitable and healthier markets.

 

We hope you have found this blog useful and learned more DEX and how they work. Please visit our Blog page for more blockchain related news and articles. If you would like to learn more about DEX, please read Part 2 – DEX.

TokenMason is a leading blockchain development company that helps organizations build customized blockchain solutions, such as launch ICOs, develop cryptocurrency, smart contracts, apps that use cryptocurrency, decentralized exchanges and other blockchain-related projects.

Submit an enquiry if you would like to receive a quote for your customized blockchain project or discuss a strategy to make your blockchain-related idea a reality. TokenMason welcomes the opportunity to discuss how we may be able to assist.

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