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If you’re interested in finding a new token in its inception, DeFi is the place to be. DEXs offer a limitless range of tokens, from the popular ones to the weird and totally random alt coins.

What is a Decentralised Exchange?

What is a DEX?

A decentralized exchange (DEX) is a peer-to-peer trading market where transactions happen directly between crypto traders. DEXs fulfil one of crypto’s core utility: easing financial transactions that aren’t regulated by banks, payment processors, or any other kind of official intermediary. The most popular DEXs, like PancakeSwap and UniSwap utilize the Binance or Ethereum blockchain and are part of the booming suite of DeFi tools, which creates a huge range of financial services directly compatible to a crypto wallet. DEXs are popular, in the first quarter of 2021, more than $210 billion in transactions flowed through decentralized exchanges. As of April 2021, there were more than two million traders, a ten-fold increase from May 2020.

How do the Decentralised Exchanges work?

Unlike centralised exchanges like Binance, DEXs don’t allow for exchanges between fiat currency and crypto. Instead, they exclusively trade crypto tokens for other crypto tokens. From a centralised exchange, you can trade fiat to crypto (and vice versa) or crypto to crypto pair. As an example, some of your Matic for Bitcoin. You can also make more complex transactions, like leverage trades or setting buy orders. But all these transactions are done by the exchange itself via an order book that establishes the price for a set cryptocurrency based on current buy and sell orders — the same method used by stock exchanges like Dow Jones.

Decentralized exchanges are simply a set of executed smart contracts. They establish the prices of various cryptocurrencies against each other algorithmically and use liquidity pools — in which investors can lock their funds in exchange for an interest or ROI to facilitate trades. While transactions on a CEX are recorded on that exchange’s internal database, DEX transactions are done and recorded directly on the blockchain.

DEXs are mainly built on open-source code, meaning that anyone interested can see exactly how they work and check codes for irregularities. That also means that developers can adapt existing code to create new projects which is how UniSwap’s code has been adapted by an entire host of DEXs with Swap in their names like QuickSwap and ApeSwap.

What are the benefits of using a DEX?

A vast array of choices: If you’re interested in finding a new token in its inception, DeFi is the place to be. DEXs offer a limitless range of tokens, from the popular ones to the weird and totally random alt coins. That’s because anyone can mint a new token and create a liquidity pool for it, so you’ll find a greater range of projects, both recognised and unrecognised.

Security is improved: Because all of the funds in a Decentralised Exchange trade are stored on the traders’ own wallet, they are theoretically less likely to be hacked.

Anonymity: No personal information is necessary to use the most popular Decentralised Exchanges.


What are some potential downsides?

Trickier user interfaces Navigating decentralized exchanges requires some specialized knowledge and the interfaces aren’t always easy — be prepared to do a lot of research and don’t expect the DEX itself to offer much handholding. You’ll generally have to look offsite for a walk-through or explainer. Caution is required because it’s possible to make an unfixable error, like sending coins to the wrong wallet. Another common issue is known as “impermanent loss,” which can result from pairing a more volatile cryptocurrency with a less volatile one in a liquidity pool. (The main takeaway here? Do your own research.)

How do DEX fees work?

Fees can vary from one DEX to another. PancakeSwap charges a 0.25% fee that is split between liquidity providers, and a project fee could be added in the future. The ongoing Ethereum V2 upgrade as well as several new Layer 2 solutions like Polygon are designed in part to lower fees and speed up transactions.

Written By

Petrache Ionut

May 28, 2022