What Is a DEX (Decentralized Exchange)?

What Is A Decentralized Exchange?

A decentralized crypto exchange is a blockchain-based app that coordinates large-scale trading of crypto assets between users. Unlike a centralized exchange (CEX), a decentralized exchange does not rely on a third-party intermediary; everything goes through an automated algorithm.

The algorithms used by decentralized exchanges are an example of smart contracts. They are pieces of code written on top of a blockchain network such as Ethereum (ETH) and trigger various outputs based on specific inputs.

DEXs were created with the sole purpose of getting rid of intermediaries when trading crypto assets. They allow regular people to conduct trades with each other. With a DEX, users retain full custody of their assets.

DEXs Are Growing

In the beginning, most DEXs were inefficient and could not compete with major centralized exchanges. However, that has changed in recent years. The world’s biggest DEXs now pose a genuine challenge to leading centralized exchanges by volume.

With a DEX, there is no conventional order book where buyers and sellers are a match based on order prices and trading volumes. Instead, DEXs use liquidity pools. In these pools, there is a collection of crypto assets waiting to clear a buy or sell order as it comes. The assets in a pool come from crypto investors, who deposit the funds for the chance to earn a yield from transaction fees charged to use a pool.

Today, the biggest and most successful DEX is Uniswap. The DEX was launched on Ethereum in 2018 and took off shortly after. Its creator was a mechanical engineer who taught himself how to code after being laid off by Siemens the previous years. By the end of 2021, Uniswap posted average daily trading volumes of over $1 billion.

In 2022, Uniswap v3.0 handled over $2 billion in trading volumes on some days before the collapse of the crypto markets. Its closest competitor is PancakeSwap, handling trading volumes of around $600 million daily before the market-wide correction.

Types of DEXs

The main types of decentralized exchanges are automated market makers, order book DEXs, and DEX aggregators. All of them allow traders to interact with each other without an intermediary.

The Automated Market Maker (AAM) DEX

The automated market maker (AMM) DEX is a smart contract system that solves the liquidity problem. They use blockchain-based services, which provide information on setting prices called blockchain oracles. These platforms rely on pre-funded pools called liquidity pools to facilitate trades. As described above, those who fund the pools receive a portion of the transaction fee. Uniswap, Balancer, and Curve Finance are some of the examples who use this protocol.

Order Book DEX

The second type is an order book DEX. As the name implies, it has an order book of buy orders on one side and sell orders on the other. Buy orders signal that a trader is willing to buy an asset at a set price, and a sell order signals that a trader is ready to sell at a set price. The spread between these two determines the depth of the order book and the market price on the platform. RtherDelta, Paradex, and Radar Relay are the examples of order book DEX.

DEX Aggregator

The third and final type is a DEX aggregator. This type of exchange uses different protocols and mechanisms to deal with the issue of liquidity. These platforms aggregate liquidity from other DEXs to minimize slippage on huge orders. They also optimize swap fees and token prices and offer traders the best price in the shortest time possible. Top DEX Aggregators include 1Inch, PancakeSwap, and Slingshot.

Interesting DEX Crypto Examples

Serum DEX Crypto

Serum is a renowned decentralized exchange (DEX) and ecosystem famous for its speed and cost-efficiency. It is built on Solana and has a native token as well, generally known as SRM.

Ronin DEX Crypto

Ronin, which is also known as Katana, is a decentralized exchange based on an Ethereum sidechain. DEX crypto example is Ronin RON that is being traded at $0.347 nowadays.

Jam DEX Crypto

Jam DEX is a bit different as it was launched by Jamaica to facilitate its people in using its CBDC. It has its own wallet as well named CBDC Wallet.

Ergo DEX Crypto

Ergo is a next-generation decentralized exchange crypto that uses an innovative smart contract platform. DEX crypto example is ERG which has a price of $1.64 in July 2022.