What Is a DEX?

Existing centralised cryptocurrency exchanges are always in danger of suffering a dangerous hack, data breach, or any other instance of unauthorised access. This can put their user funds in danger, as many instances in the past have shown us. Luckily for us, decentralised exchanges, or DEXs, can solve this problem by offering heightened security through decentralisation.

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What Is a Decentralised Exchange or DEX?

A decentralised exchange, or DEX, is a P2P crypto marketplace that facilitates transactions between crypto traders. They fulfil one of the main functions of cryptocurrencies: They foster financial transactions that can’t be executed by payment processors, brokers, banks, or any other third-party intermediary.

Some of the most popular DEXs, such as SushiSwap and Uniswap, use the Ethereum blockchain and are part of the fledgling decentralised finance space. They have always been at the forefront of the cryptocurrency revolution, as most traders prefer them for their security and ease of use. Some of the largest DEXs by trading volume last year were Uniswap with $213.3 billion, followed by Curve with $48.9 billion.

Explaining How DEXs Work

Decentralised exchanges do not allow exchanges between crypto and fiat, unlike centralised exchanges. Instead, DEXs exclusively deal with crypto-to-crypto trading. They do this by running a set of smart contracts. They use an algorithm to establish the price of various cryptocurrencies. They also use liquidity pools, where investors lock funds away to facilitate trades in exchange for interest-like rewards. 

Most decentralised exchanges are built using open-source codes, which allow anyone to see how they work. Developers can easily adapt the existing codes to create new competing projects. This is seen in an entire set of DEXs with the term “Swap” in their names (PancakeSwap and SushiSwap), which have adopted Uniswap’s existing code.

Why Do Traders Prefer Using a Decentralised Exchange?

Using a decentralised exchange has a lot of advantages for all kinds of traders.

A Lot of Variety

Traders interested in finding a trending token in its infancy should always search the DeFi market. DEXs offer a limitless amount of tokens, from the most rare to the most well known. Anyone can mint an Ethereum-based cryptocurrency and create a liquidity pool for it. This increases the chances of finding a greater set of vetted and unvetted projects.

Reduces Hacking Risks

All the funds in a decentralised exchange trade are stored in the wallets of the traders. This makes the funds less susceptible to any data breach of any kind. It also reduces counterparty risk, which is the possibility that one of the involved parties will default.

Real-World Utility

Decentralised exchanges have the anonymity, speedy transactions, and peer-to-peer lending required to make them popular in developing economies or places where banking infrastructure is scarce. Anyone with a smartphone and an internet connection can trade using a DEX.

How Are DEXs Better Than CEXs?

The primary advantage that DEXs have over CEXs is their decentralised nature, which traders prefer for many reasons.

Better Security and Privacy

DEXs do not require users to deposit their funds into a centralised wallet. In this case, users still have control over their private keys and can execute trades directly from their wallets. This reduces the risk of hacking or theft associated with centralised storage. They also allow users to trade without extensive identity verification requirements, which is appealing to individuals who value privacy or are in locations with strict regulations.

Resistant Against Censorship

DEXs are resistant to censorship because they operate on decentralised networks. The transactions cannot be easily restricted or blocked by authorities or third parties. On the other hand, centralised exchanges can face numerous legal and regulatory challenges that can result in shutdowns.

Unparalleled Transparency

DEXs can provide transparent transaction records and smart contract functionality, which allow users to audit and verify the operations of the exchange in question. On the other hand, centralised exchanges usually operate proprietary systems, which makes it tough to verify the fairness and accuracy of their operations.

Types of DEX Fees

The fees in DEXs can vary depending on the platform and the type of transactions occurring. Some of the different types of DEX fees include the following:

Trading Fee

DEXs charge a trading fee for every swap or trade on their platforms. It usually goes to the liquidity providers that supply funds to the DEX. For instance, Uniswap charges a 0.3% trading fee, while Binance DEX charges 0.1%.

BTC Fee

DEXs charge a BTC fee for swapping BTC or any other BTC-based token on the DEX. This fee is used to pay the BTC network fees and the DeFiChain miners for securing the network.

dUSD/dToken Fee

This is the fee charged for swapping dUSD or any dToken, which are synthetic tokens pegged to real-world assets. It mainly goes towards the Oracle and DeFiChain miners for securing the transactions.

Stabilisation Fee

DEXs sometimes charge fees to maintain the stability of their algorithmic stablecoins. This depends on the relative supply of the stablecoin on the DEX.

Conclusion

DEXs have become the cornerstone of the DeFi world and serve as building blocks for developing other sophisticated financial products using permissionless composability.

Frequently Asked Questions

Why Is a Decentralised Exchange Better?

Decentralised exchanges are better due to their high level of security. Instead of storing user funds in a centralised location, DEXs distribute them across the blockchain, which offers more protection against cyberattacks

What Was the First DEX Ever Created?

The first decentralised exchange to be launched was the NXT Asset Exchange. It was an early version of a DEX that was launched in January 2014, allowing users to trade crypto without any intermediaries.

How to Select the Best DEX?

Selecting the best DEX depends on the personal preferences of the trader in question. However, there are some key factors that are common. Traders should always look for a DEX with a good track record that doesn’t have any past instances of data breaches of any kind. They should be able to provide ample liquidity.