What is a DEX?
Decentralized Exchanges or DEXs are blockchain-based programs that facilitate large-scale crypto asset trading among multiple users. Instead of functioning as a financial mediator between buyers and sellers, they do it entirely through automated algorithms.
It’s a peer-to-peer marketplace where crypto dealers trade directly with each other. DEXs enable one of crypto’s most essential features: facilitating financial transactions that aren’t mediated by banks, brokers, or other third parties.
Smart contracts are the algorithms that DEXs employ. They are pieces of code created on top of blockchain networks that trigger multiple outputs when given particular inputs.
The concept of a DEX is “disintermediation,” or the removal of middlemen to allow ordinary people to transact business directly with one another. A DEX does not provide users with custody of their crypto assets. Users instead keep all of their valuables in their wallets at all times.
How does DEX work?
Smart contracts are used to create decentralized exchanges.
DEXs do not allow fiat-to-crypto transfers; they trade cryptocurrency tokens for other tokens. They employ “liquidity pools” in exchange for interest-like returns to ease trades and set the prices of multiple cryptocurrencies against each other.
DEXs are typically designed with open-source code, allowing anyone with interest to understand how they work. This implies programmers can modify existing code to establish new competitive projects.
Benefits of using DEX
● Defending against hacking: Decentralized exchange users are not required to transfer their assets to a third party. As a result, there is no possibility of a firm or organization being hacked, and users are protected from theft and hacking.
● Market manipulation prevention: Decentralized exchanges eliminate market manipulation by enabling peer-to-peer cryptocurrency exchange. This protects customers against fraudulent trading and wash trading.
● Confidentiality: Customers on decentralized exchanges are not required to fill out know-your-customer (KYC) forms, giving them privacy and anonymity.
● Complexity: Users of decentralized exchanges must never forget their crypto wallet keys and passwords, or their assets will be lost forever and not recoverable. Unlike centralized exchanges, which provide a more convenient and user-friendly method, they demand the user learn and become comfortable with the platform and the process.
● No fiat payments: Users who do not already own cryptocurrencies will find decentralized exchanges less convenient because they do not allow them to trade fiat currency for digital ones.
● Liquidity problems: Centralized exchanges facilitate 99 percent of crypto transactions, implying that they are responsible for the vast bulk of the trade book. Decentralized exchanges frequently lack liquidity due to a lack of volume, making it challenging to identify buyers and sellers.
(written by Catherine S Thomas)