Decentralised exchanges (DEX): What you need to know

Decentralised crypto exchanges, or DEXs, offer new opportunities for traders. Once seen as a trend in 2019, they are now a key part of the crypto world. Here’s what a DEX is, how it works and how it differs from centralised exchanges.

What is a DEX?

A decentralised exchange (DEX) is a peer-to-peer trading platform that enables direct transactions between traders without an intermediary. This allows cryptocurrencies and other financial transactions to take place without banks, brokers or middlemen.

Each user acts as a "peer," trading directly and anonymously with others on the network. This setup enables the direct exchange of cryptocurrencies, tokens and other digital assets between users' wallets.

How does a decentralised exchange work?

DEXs operate using blockchain technology and two key components: peer-to-peer networks and self-executing smart contracts. Together, they ensure secure, autonomous trading without central oversight.

Peer-to-Peer Networks (P2P):

In a peer-to-peer (P2P) network, all users are directly connected without a central authority processing or verifying transactions. Each peer acts as both a client and a server, enabling direct exchange of information or value. In a DEX, this means cryptocurrencies are transferred directly from one user’s wallet to another’s, with transactions recorded on the blockchain.

Smart Contracts:

Smart contracts are self-executing agreements with terms written in code. They run on the blockchain, are transparent to all users and cannot be altered. In a DEX, smart contracts define and enforce trading rules automatically. For example, if a user wants to swap Token A for Token B, the smart contract checks the trade conditions (e.g. availability of tokens) and executes the transaction only if all criteria are met.

The combination of P2P networks and smart contracts creates a secure environment where transactions occur without third-party interference or manipulation. Since no central authority is required, users retain privacy and full control over their assets. This makes DEXs a transparent, efficient and decentralised trading option for crypto traders.

DEX vs CEX – What’s the difference?

Both centralised exchanges (CEXs) and decentralised exchanges (DEXs) facilitate crypto trading, but they operate differently.

Zentralised exchanges (CEXs) are managed by a central entity, such as a company or organisation, which oversees and processes transactions. In contrast, decentralised exchanges (DEXs) operate on a blockchain without a central authority, allowing users to trade directly with one another.

Transactions on a CEX are executed by the exchange itself, meaning users temporarily deposit their funds into the platform’s custody for trading. On a DEX, however, trades are executed through smart contracts, ensuring that assets remain in the user’s control until the trade is completed.

This key difference affects security. Since CEXs store users’ funds, they are more vulnerable to hacking attacks. DEXs, on the other hand, do not hold assets, reducing the risk of theft or platform breaches. Additionally, user data is more secure on a DEX, as most decentralised exchanges do not require identity verification (Know Your Customer – KYC). This means traders can remain anonymous, whereas CEXs typically demand personal identification.

Another major difference is the fiat-to-crypto trading. CEXs allow users to buy cryptocurrencies directly using fiat money (such as euros or US dollars) via bank transfers or credit cards. DEXs, however, do not support direct fiat transactions, requiring users to exchange stablecoins instead.

Additionally, liquidity provision differs between the two exchange types. CEXs use order books, where buyers and sellers place bids, and the exchange determines prices based on supply and demand. DEXs, however, rely on liquidity pools, where users deposit crypto assets to facilitate trading. In return, liquidity providers earn rewards, similar to earning interest. Prices on a DEX are determined by the ratio of tokens in the pool, meaning changes in liquidity directly affect pricing. These liquidity pools ensure that transactions can be executed even without a direct counterparty.

Which crypto exchanges are decentralised?

As of April 2024, there are over 750 decentralised exchanges (DEXs). The largest by 24-hour trading volume are:

• Uniswap V3 (Ethereum)

• Jupiter

• Uniswap V3 (Arbitrum One)

• PancakeSwap V3 (BSC)

• Orca

• Curve (Ethereum)

Pros and cons of a DEX

Decentralised exchanges offer many advantages, but they also come with challenges. Whether a DEX is right for you depends on weighing the pros and cons.

Pros of using a DEX

• Full control – Users retain control over their private keys and crypto assets

• Enhanced security – No central authority means reduced risk of hacks or theft

• Privacy & anonymity – Most DEXs don’t require identity verification

• Censorship resistance – No central entity can block transactions

• Advanced technology – Uses smart contracts for secure, automated trading

• Open-source software – Transparent and community-audited

• Wide crypto selection – Supports a vast range of digital assets, including new tokens

• Global access – Can be used in regions with limited financial infrastructure

Cons of using a DEX

• Complexity – Less user-friendly than CEXs, with no customer support

• Lower liquidity – Can lead to higher slippage and price volatility

• Slower transactions – Blockchain-based trading can be slower than centralised exchanges

• Limited features – Lacks advanced trading tools available on CEXs

• No fiat-to-crypto trading – Requires stablecoins instead of direct fiat transactions

• Self-custody risk – Users are responsible for securely storing their assets

While DEXs provide security, privacy and full asset control, they can be less intuitive for beginners and may have liquidity limitations compared to CEXs.

6 tips for maximum security when trading on a DEX

While decentralised exchanges (DEXs) offer greater security than centralised exchanges (CEXs), they still come with risks. Knowing these risks helps you take the right steps to protect your crypto assets.

Tip 1: Secure storage of private keys
Since DEX users have full control over their private keys, it’s crucial to store them safely. Use hardware wallets or other secure storage methods.

Tip 2: Avoid phishing attacks
Be cautious of phishing attempts designed to steal access to your crypto wallets. Always double-check the DEX URL and avoid clicking on suspicious links.

Tip 3: Use secure internet connections
void public Wi-Fi when accessing your crypto wallet or a DEX. Use a secure, private connection or, ideally, a VPN for extra protection.

Tip 4: Keep software updated
Ensure your wallet software and other security tools are always up to date to protect against emerging threats.

Tip 5: Limit the amount of crypto on a DEX
Only keep the crypto you actively trade on a DEX. Larger amounts should be stored in a personal wallet to reduce risk in case of a security breach.

Tip 6: Understand smart contracts
Since DEXs operate through smart contracts, it’s important to understand how they work and their potential security risks. Choose DEXs that undergo regular security audits.

How to buy cryptocurrencies on a DEX

Buying crypto on a DEX is straightforward. Follow these steps to start trading decentralised:

Step 1: Choose a compatible wallet
To trade on a DEX, you need a crypto wallet that supports smart contracts. Popular options include MetaMask, Trust Wallet or Ledger Wallets, allowing direct interaction with the DEX via browser extensions or mobile apps.

Step 2: Transfer crypto into your wallet
Since DEXs don’t support direct fiat-to-crypto transactions, you must first deposit cryptocurrency into your wallet. You can transfer funds from another wallet or buy crypto on a centralised exchange before moving it to your DEX wallet. Common base currencies on DEXs include Ethereum (ETH) for Ethereum-based networks or Binance Coin (BNB) for Binance Smart Chain DEXs.

Step 3: Choose a DEX
There are many DEXs to choose from. Ensure your chosen DEX supports the cryptocurrencies you wish to trade.

Step 4: Connect your wallet to the DEX
Go to the official DEX website and connect your wallet by selecting “Connect Wallet” or a similar option. Follow the instructions to securely establish the connection.

Step 5: Execute your trade
Once connected, select the crypto pair you want to trade. Enter the amount you wish to buy and ensure you have enough balance for both the purchase and transaction fees. Double-check the transaction details, including slippage settings and network fees.

Step 6: Confirm the trade
When ready, confirm the transaction in your wallet. The DEX’s smart contract will process your order, and your new coins or tokens will appear in your wallet once completed.

What fees apply on a DEX?

Trading on a decentralised exchange (DEX) can involve various fees. The most common is the transaction fee (gas fee), charged for processing transactions on the blockchain. Gas fees vary based on network congestion and transaction complexity and are paid directly to miners or validators who secure the blockchain and process the transaction.

Another key fee is the swap fee, which applies when exchanging one cryptocurrency for another via a smart contract. These fees are usually a percentage of the trade volume and help maintain the liquidity pools that enable trading on a DEX. Additionally, some platforms may introduce a protocol fee in the future.

If you provide liquidity by depositing assets into a liquidity pool to earn rewards, additional fees may apply. However, these are often lower than active trading fees and can sometimes be offset by the returns earned.

Another important cost factor is slippage. While not a direct fee, slippage refers to the difference between the expected price of a trade and the actual price at execution. This is particularly relevant in markets with low liquidity, where significant price fluctuations can occur.

The evolution of DEXs and their future

The concept of decentralised exchanges (DEXs) began with early attempts to create a fully decentralised trading platform, independent of traditional banking infrastructure and central intermediaries. Initially, these exchanges suffered from low liquidity and poor usability. However, the introduction of Ethereum and smart contracts marked a turning point, allowing for automated trading mechanisms and on-chain liquidity provision.

Early platforms like EtherDelta showcased the potential of DEXs, but it wasn’t until protocols like Uniswap introduced the Automated Market Maker (AMM) model that DEXs gained widespread adoption. AMMs replace traditional order books with liquidity pools, allowing users to deposit assets, facilitate trading and earn passive income.

Looking ahead, several key factors are shaping the future of DEXs:

Technological advancements
Developments such as Layer-2 solutions and cross-chain interoperability aim to improve speed and scalability. This could enable DEXs to compete with centralised exchanges (CEXs) not only in terms of security and transparency but also in usability and transaction speed.

Regulatory developments
As crypto regulations tighten, DEXs may gain popularity due to their decentralised nature and the ability to trade anonymously. They provide an alternative for users looking to avoid strict requirements like Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance.

Integration with traditional financial markets
As cryptocurrencies become more widely accepted, DEXs could bridge the gap between traditional finance and decentralised finance (DeFi), offering new opportunities for financial innovation.

The evolution of DEXs is an ongoing process, driven by innovation within the crypto community and beyond. It will be exciting to see how these platforms continue to develop and what new possibilities they unlock in the future.

Conclusion: Decentralisation as a driving force: the role of DEXs in the crypto world

Decentralised exchanges have evolved from an innovative idea into an essential part of the cryptocurrency ecosystem. They enable users to trade directly with one another without intermediaries, offering greater control, security, and privacy.

The introduction of smart contracts and peer-to-peer networks has created a trading environment free from centralised control, making DEXs particularly appealing to those seeking financial independence. The adoption of Automated Market Makers (AMMs) and the increasing support for liquidity pools have significantly improved the functionality and user experience of DEXs.

Despite challenges such as lower liquidity compared to CEXs and a steeper learning curve, the future of DEXs looks promising. Ongoing technological advancements and regulatory shifts could further enhance their efficiency and attractiveness, solidifying their role as a key pillar of decentralised finance.

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