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What is a DEX?
A decentralized exchange is a place for peer-to-peer trading with anonymity and low commissions. Warning: their interface can be tricky to navigate.
DEX definition: A decentralized exchange is a blockchain-driven marketplace that allows transactions between users (crypto traders) without an intermediary (a broker, bank or other middleman). Such intermediary-free communication is called peer-to-peer (P2P) trading.
DEXs are powered by smart contracts.
A smart contract is code written on a blockchain such as Ethereum. It serves as the core of transaction management within DEXs. In CEXs, the core is a central authority that both manages transactions and stores your funds. In DEXs, on the other hand, you are responsible for your crypto holdings (aka the keys that give you access to those holdings on your blockchain address).
Unlike its competitors, centralized exchanges, DEXs are non KYC crypto exchanges (KYC stands for “Know Your Customer”). So, they offer low commissions and anonymity, although they are considered difficult to navigate for beginners.
💡OneArt created a more comprehensive look at DEXs and CEXs to make it easier for you to choose the one that meets your needs.
Examples of famous DEX 2022:
- Uniswap
- PancakeSwap
- Dodo
- Curve, etc.
The most popular DEX today (i.e early November 2022) is Uniswap v3 with 45.7% market share by volume. Next is PancakeSwap v2 with 6.3% and Curve 6.0% respectively.
Key DEXs features
- Transactions on a crypto exchanges without KYC (aka DEXs) are "logged/recorded" on the blockchain, while on a centralized exchange — in the internal database of that exchange, meaning that your data is available to CEX administrators. Hence, DEX can be described as an anonymous crypto exchange whereas CEX is not.
- DEX is built on the basis of open source code, i.e. anyone can see how this code is constructed. It also allows developers to use the source code and customize it to their needs. For example, Pancakeswap has Uniswap code as its technical base.
- To deal with a DEX and store the keys to your assets, it’s advisable to have a wallet that is compatible with smart contracts on the exchange network. A mobile wallet is more secure and convenient in this case.
DEX benefits
✅Variety of tokens
Decentralized exchanges are teeming with a variety of tokens, from the poorly known to the popular and trusted. Technically, such exchanges can include any tokens that are minted on the blockchain on which they are built.
✅Privacy
You do not have to go through the standard Know Your Customer (KYC) procedure to start transactions. This means that your data is not accumulated anywhere and is not available to anyone.
✅Minimized risks
DEX does not store your funds. They are kept in a user's wallet linked to the exchange (amend: the coins are stored on the blockchain while the wallet holds the keys to those coins). In theory, this reduces the risk of theft. In this case, security is more likely to depend not on the exchange, but on the wallet.
✅No counterparty risk
Unlike CEX, DEX has no third party controlling transactions. That means that there are only two parties involved in e.g. the exchange of coins, one of which is you. It reduces the so-called counterparty risk: the possibility that one of the parties involved in a transaction (it can be a third party in CEX) declares a default.
Disadvantages of DEX
👎Difficult to navigate
It will be tricky for a newcomer to navigate DEXs, as they often have a complicated interface. Using wallets linked to an exchange also requires attention.
❗️Withdrawing coins to the wrong network is one of the most popular mistakes when using a DEX and wallet tied to it. So, be careful and double-check the data you enter (addresses and networks).
👎Code vulnerability
The security level of an exchange depends on the security level of its code, i.e. the smart contracts. Even with numerous tests, there is always a risk of code vulnerability.
👎"Unverified" tokens
On the one hand, exchanges provide opportunities for anyone to place a token, but not all of them can be "in good faith". They may be scammers who will take advantage of your inexperience.
ProTip: If you come across an interesting token, don't rush to invest in it. Make a research of the token, its creators (i.e. the project), connect with the community, and track their activity.
