Hi and welcome to a new Cryptomatics episode! In this short video, we will explain what decentralized
exchanges (DEX) are and how they work. We will also briefly cover
some of their pros and cons. What is a Decentralized Exchange (DEX)? In the crypto area, a DEX is a
type of cryptocurrency exchange that allows users to buy and sell crypto
through direct peer-to-peer transactions. It works in a decentralized way,
without relying on a central authority. A DEX shares some similarities with a centralized
exchange (CEX) as it allows customers to trade cryptocurrencies for other assets, be
it fiat money or another cryptocurrency. One major difference between
the two types of exchanges is that in the case of a DEX, the third
party that oversees the asset transfer and security is substituted for a
distributed ledger or blockchain. Moreover, users don’t need to
give up custody of their funds, having control over them at all times.
How Does a DEX Work? A DEX operates without an intermediary for clearing transactions, and
orders are executed on-chain. To facilitate trading, it relies
on self-executing smart contracts. It uses different DeFi protocols and mechanisms, such as order books, liquidity
pools, AMMs, and aggregation tools. Based on that, we can talk about different
types and generations of DEXs, including: Order book DEXs, such as dYdX and Binance DEX And Swap DEXs, such as Uniswap, Curve,
SushiSwap, Balancer, Bancor, and Kyber. Some of their components have
varying degrees of decentralization, which has led even to
semi-decentralized exchanges. Pros of DEXs DEXs come with several advantages, as follows: They don’t hold users’ funds, so
there is no counterparty risk.
Anti-Money Laundering (AML)/Know Your Customer
(KYC) compliance is not a norm in this case, and the users’ identity is not
checked since they are permissionless. All that is required is a crypto-wallet. Since critical operations
are moved onto a blockchain, the technology used eliminates
single points of failure. Given that users don’t have to
transfer their assets to an exchange, the risk of theft or loss of
funds caused by hacks is reduced. Customers have access to a greater token variety. Cons of DEXs Despite their many benefits, DEXs
are not free of disadvantages. Some of their cons include: – Low trading volume and liquidity – No recovery ability – since users hold their
private keys and there is no KYC process or way to revert a transaction, in case they get
lost or stolen, the DEX cannot recover them. – Higher transaction fees – Network congestion when
there is a high trading volume; – Usability – they are less user-friendly than centralized exchanges and have
limited trading functionalities – Price Slippage Conclusion To sum up, even though many decentralized
exchanges have emerged in recent years, there is still room for improvement,
and centralized exchanges are currently the preferred choice for many crypto traders.
We hope you enjoyed this video! Let us know if there is more
on DEX you’d like us to cover and don’t forget to subscribe to
Cryptomatics for more DeFi content..
