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November 11, 2022

What Is A DEX?

What Is A DEX?

Definition

DEX is short for decentralized exchange. They are peer-to-peer marketplaces where cryptocurrency investors can complete transactions with one another without a centralized middleman.

Decentralized crypto exchanges provide one of the most important elements of defi – the ability to buy, sell, and swap cryptocurrencies without a financial institution, broker, bank, or large corporate exchange.

So, what is a DEX, how do they work, and why are they important?

How Do DEXs Work?

The main difference between crypto decentralized exchanges and traditional exchanges such as Coinbase is the fact they don’t work with fiat currency. By design, they are used for cryptocurrency-only transactions, meaning no fiat money can pass through the network.

With a centralized exchange, you can use your dollars to buy cryptocurrency. Then, you can sell your cryptocurrency and receive dollars in return. However, all of these transactions are processed by the exchange, they go through the platform's order book rather than the decentralized blockchain network used by DEXs.

On the other hand, decentralized crypto exchanges use the open-source blockchain to settle transactions. By harnessing the power of smart contracts, DEXs are able to ensure a smooth and transparent transaction process that protects buyers, sellers, and swappers.

The Benefits of A Decentralized Crypto Exchange

Freedom To Choose

There are thousands of cryptocurrencies currently available to trade. However, centralized exchanges have the power to choose which they are going to list on their platform. By doing so, they’re retaining power, and deciding what you can and cannot trade. Often, they only choose established coins with high trading volumes that have developed a reputation for security.

On the flip side, a decentralized exchange provides the platform for up-and-coming, less established coins to be traded. The advantages of P2P DEXs open up the ability to buy and sell many altcoins you may not otherwise get access to.

Security of Trustless Transactions

As mentioned, a decentralized exchange uses smart contracts to process transactions rather than the order book of a CEX. All trades are recorded on the blockchain for all to see. What’s great about this is the drastically reduced risk of hacking. CEXs are obvious targets for hacking as they store funds, process thousands of transactions, and hold crypto wallet information.

A DEX doesn’t hold any funds at all, meaning the chance of a hack drastically reduces.

Lower Fees

Transaction fees and gas fees are one of the most talked about topics in crypto. As there is no intermediary taking a cut for their services, DEXs use the exact same gas fees as the network it’s built on. It’s important to remember these fees fluctuate based on network activity and demand.

Data Privacy

When signing up for a CEX, you have to provide some basic personal information. Also, if you haven’t set up your own external crypto wallet, the exchange keeps hold of the private keys. This means you don’t actually own the wallet.

To use a DEX, you need your own digital wallet, meaning your private keys are not stored in the exchanges database. This allows you, as the wallet owner, to establish your own security measure, giving you complete control over your cryptocurrency.

The Disadvantage of A Decentralized Crypto Exchange

Usability

While CEXs are the most popular way of trading crypto, DEXs are very much in their infancy. Currently, the platforms aren’t as user-friendly as their centralized counterparts. If you’re new to crypto and blockchain technology, they can be daunting and difficult to use.

Firstly, users must choose an external digital wallet and fund this with cryptocurrencies. Then, they need to link their new digital wallet with the DEX. Until they’ve done this, they can’t use the decentralized crypto exchange.

Compared with signing up for and using a centralized exchange, this is a long-winded process and a sharp learning curve for newbies.

Liquidity

P2P transfers rely on market liquidity. As there is no centralized exchange, there needs to be individual buyers and sellers active in the market at all times. That being said, crypto decentralized exchanges are growing in popularity and are becoming more widely accepted. As crypto adoption increases and more people become familiar with blockchain technology, investors will continue to switch from CEX to DEX.

Fiat Compatibility

To facilitate the mass adoption of decentralized exchanges, they need to address the problem of not accepting transactions that facilitate buying crypto with fiat currency. As it stands, users would have to work with another platform to buy crypto with dollars, and if they want to exit the crypto space and convert back to dollars.

This functionality would open DEXs to a mass audience, helping new investors start there rather than having to opt for the usability of CEX.

In Summary

So, what is a decentralized crypto exchange? They are platforms that enable P2P crypto transactions to take place. The key benefits of a DEX enable investors to stay true to the core principles of cryptocurrency and decentralized finance. Furthermore, they provide a level of security that can’t be matched by centralized exchanges.

Check out Escrypto’s range of institutional-grade crypto wallets that empower you to start trading on decentralized exchanges while keeping your portfolio more secure than ever.

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