Decentralized Exchange (DEX)
What Is a Decentralized Exchange (DEX)
A decentralized exchange (DEX) is a peer-to-peer platform that facilitates cryptocurrency trading without a central authority. Unlike centralized exchanges (CEXs), DEXs use blockchain technology for direct transactions between users, enhancing security, privacy, and user autonomy. DEXs operate on blockchain networks, utilizing smart contracts to automate trade execution based on predefined conditions. This eliminates the need for intermediaries while ensuring transparency, accessibility, and immutability of transaction records.
DEXs typically use liquidity pools, which aggregate the collections of cryptocurrency assets users contribute, to facilitate trading. Automated Market Makers (AMMs) are the primary mechanism used by DEXs to match buy and sell orders and determine asset prices. Just as all other dApps, users pay transaction fees, known as gas fees, to complete these transactions on the blockchain network, as well as trading commissions.
A typical DEX transaction involves a user initiating a trade, which is then executed by the DEX's smart contract. The transaction is recorded on the blockchain, and the exchanged assets are reflected in the user's cryptocurrency wallet upon confirmation.