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What are decentralized crypto exchanges (DEX)?


Decentralized crypto exchanges (DEX).

decentralized crypto exchanges, dex

Decentralized exchanges DEXs charge users much less than their centralized counterparts but can be much more difficult to navigate and use.

Decentralized crypto exchanges (DEXs) are blockchain-based applications that coordinate large-scale exchanges of crypto assets among many users. They do this through fully automated algorithms, rather than the traditional approach of acting as a financial intermediary between buyers and sellers.

Algorithms used by DEXs are examples of smart contracts. These are pieces of code written in blockchain networks like Ethereum that trigger various outputs when given certain inputs.

The idea behind a DEX is "non-mediation", which means removing the middleman to allow ordinary people to do business directly with each other. A DEX does not offer custody of users' crypto assets. Instead, users always keep all their assets directly in their wallets.

Decentralized and centralized crypto exchanges:

According to a report by global accounting KPMG, the largest crypto DEXs had begun challenging some of the largest centralized exchanges (CEX) in terms of trading volume by the end of 2021. Just as exchanges are the largest crypto businesses, DEXs are also the largest decentralized entities.

Typically, DEXs do away with traditional currency order books in favor of "liquidity pools" where buyers and sellers are matched by price and order volume. These are crypto-assets that sit below the surface of the exchange waiting to clear any visible buy or sell orders. The assets in the pool come from the investors who deposit them to earn a return on the transaction fees charged to the pool users.

The biggest DEX is Uniswap, created in 2018 on the Ethereum blockchain by a former mechanical engineer who only learned to code after being fired from Siemens the previous year. By the end of 2021, it was processing over $1 billion in transactions per day.
According to data from CoinGecko, in February 2022 Uniswap's version, 3 protocol was processing around $2 billion in transaction volume on some days. Typically it handles about three times the volume of its closest DEX competitors like PancakeSwap, which sees $300-600 million in daily volume.