Decentralized Exchange - Know all about DEXs


Satoshi Nakamoto made Bitcoin prove that money can be transferred involving no third party, but the centralized exchange concept taking his work to nowhere until Decentralized exchange or DEX arrives.

DEX is a new and emerging concept and many people are not aware of DEX yet or I can say they are not interested in decentralized exchanges, but indeed they don't understand DEX features. If you are one of those who doesn't understand DEX, then this might help you.


What is the decentralized exchange or DEX?

DEX is an application with a bunch of code that enables users to trade altcoins with another user without interfering with the third party by executing an agreement, also known as a smart contract. or

Decentralized exchanges (DEX) is an application that allows users to peer-to-peer (P2P) transactions by executing the smart contracts on a specific blockchain.

There are many decentralized exchanges in the market such as SushiSwap, Pancake, UniSwap that are running on different blockchains like ETH, BSC, Matic.

How decentralized exchange work?

First, let me explain how the centralized exchange works - So when you buy or deposit crypto on the centralized exchange then you basically give your crypto to the platform that is held in their wallet and when you trade, the platform matches your price and pair with another trader and exchange immediately with a little fee.

In another hand, DEX works exactly the opposite of centralized exchange, and it neither allows deposits nor buys. It basically connects you to a liquidity provider with the help of the smart contract.

To trade, you have to connect your decentralized wallet like MetaMask, Trust wallet containing your crypto to DEX. As soon as you confirm your transaction, it will swap your coin that can be seen in your wallet.

A decentralized exchange does not charge any fee, that's why it's so cheap, but the coins running on the blockchain can charge the fee in case of ETH fee is too high but on BSC fee is low.

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Advantages of DEX.

  • It gives you the best privacy features. Unlike a centralized exchange, DEX does not need KYC to trade.
  • DEX is totally cheaper and charges no fees.
  • You have full control of your own money and only need confirmation during the trade.
  • No password or account needed to start. It works like ready-to-eat food.
  • DEX gives you the current market price with the minimum slippage.
  • Any coin that you want to trade but not find on the centralized exchange can be available on DEX or you can add manually.
  • You don't have to transfer your fund to exchange, which reduces the theft risk.

Disadvantages of DEX.

  • Not familiar with beginner traders.
  • Can cause confusion between coins with the same name present on a different blockchain.
  • Already told you DEX does not charge any fee but the blockchain and liquidity provider does and that can be costly.
  • DEX asks for wallet access to read, send, receive your wallet and that can be risky, so make sure you trust your DEX.
  • Some DEX allows crypto staking that is connected to your wallet so if you lose the secret key of your wallet you will also lose your DEX account.
  • Help is not available if you lose your money or get into trouble, but Yeh you can ask in the community, in reality, they are only users like you.
  • Low liquidity coins can push you into trouble, suppose you bought 100 coins but you can not sell all.
  • Decentralized exchange work on smart contract and it checks both party transactions that can take time to validate.
  • DEX doesn't have features like a centralized exchange, and you won’t feel like traders.

Different between DEX and CEX.

  • D- Do not collect your data.
  • C- Collect your data.
  • D- Do not need KYC.
  • C- Maybe need KYC.
  • D- Have no access to your crypto
  • C- Have full control of your crypto.
  • D- Charge no fee for trading.
  • C- Charge fee for trading.
  • D- Can not be recovered if you lose your wallet key.
  • C- Easily to recover.
  • D- Exchange with the current market.
  • C- You can ask about your price.
  • D- Probably all coins can be traded.
  • C- Only listed can be traded.

How to use DEX.

  1. The first thing you need is a decentralized wallet and an amount of crypto in it, mostly ETH, BNB. 
  2. Find crypto you want to trade. Make sure you know which type of crypto is that like ERC20 or BEB20.
  3. Go to the DEX website and connect your wallet or you can also connect to DEX within your wallet if support Dapp.
  4. Now search for your coin, enter the amount and click swap.
  5. After a few minutes, your coin will arrive in your wallet.

Types of decentralized exchange.

There are many types of DEX claim by the expert, but major is only three types that are in use.

1. Automated Market Maker (AMM) based. All DEX you see today come in these categories. This type of DEX is organized into liquidity pools, which are rebalanced when users add or extract liquidity from one side of the pool by trading. It is also called smart contract managed reserves.

2. On-chain order books based - On-chain transactions occur on a blockchain that is reflected on the distributed, public ledger. On-chain transactions are those that have been validated or authenticated and lead to an update to the overall blockchain network.

3. Off-chain order books based - Off-chain transactions take place outside of the blockchain network. Off-chain transactions can be performed by participants who have agreed that a third party will guarantee the transaction or verify that it is valid or complete.

Some best examples of dex.

1. Pancake swap (V2) - It has the highest listed coin about 2800 and is considered one of the best DEX on the Binance Smart Chain (BEP20). It is Automated Market Maker (AMM) based decentralized exchange where users trade against liquidity.

2. UniSwap - Currently, there are UniSwap V2 and V3 working on the Ethereum blockchain for ERC20 coin swapping. It's also AMM or Smart contract-based and considered one of the simplest DEX ever.

3. dYdX - This one is the second dominating decentralized exchange and covers more than 2.5% of the total DEX market share. It is an Off-chain order book based built on the Ethereum blockchain. The exchange combines the security and transparency of a decentralized exchange with the speed and usability of a centralized exchange.

4. 1inch Exchange - Want to use DEX with centralized feel then try 1inch decentralized Exchange. It connects both centralized and decentralized exchange for finding the best paths across over 60+ liquidity sources on Ethereum, 30+ liquidity sources on Binance Smart Chain, 30+ liquidity sources on Polygon.

5. Binance DEX - Love BEP20 coins, then try Binance DEX it gives the exact feel of Binance.com. It is an order book-based DEX and you can only swap BEP20 token with BNB coin.

If you are using DEX for privacy cover, then it's ok but, remember at a certain point you have to compromise with your privacy otherwise you could convert your cryptos into fiat. And also if you are a beginner in the crypto world, then I recommend watching some DEX tutorials or trying with an empty wallet before using actual cryptos.

That's it. Now you tell me what you think about DEX and what was your experience or is there any info I'm missing mention in the box.


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