Fundamentals: What is a decentralized exchange (DEX)?
A quick guide to understanding decentralized exchanges.
Centralized and decentralized exchanges
Similar to a centralized exchange, like Coinbase or Binance, a DEX is a marketplace where users can buy, sell, or swap cryptocurrencies.
But instead of being centralized entities, DEXes are decentralized apps built on blockchains. And trades on DEXes are all conducted peer-to-peer, with liquidity sourced from other crypto traders. Centralized exchanges are often the first touchpoint for crypto users. But it is decentralized exchanges that fulfill one of crypto’s true promises: facilitating financial transactions that aren’t controlled by brokers, financial institutions, or any other intermediary. In 2022, DEXes settled more than $850 billion in transactions across more than 5 million users.
How does a DEX work?
Decentralized exchanges, like Uniswap or Matcha, are simple — they’re a set of smart contracts (usually open source) that execute trades on-chain. Users can connect their self-custody wallet, like Metamask or Coinbase Wallet to a DEX, and immediately begin trading thousands of tokens, without needing to sign up or share personal information. And unlike centralized exchanges, every DEX transaction is automatically settled in a trustless manner that doesn’t require any third parties. There are DEXes across many blockchains, but the most popular ones are built on Ethereum.
Why should I use a DEX?
DEX’s are accessible to everyone.
All you need to access a DEX is a smartphone, and access to the internet. Because DEXes are open-source and are built on blockchains, this makes them resistant to the limits on access that are often imposed on centralized exchanges by governments.
Using a DEX preserves your privacy.
Using a centralized exchange usually requires registration and sending sensitive information, like government identification numbers and bank account information to these centralized entities. With a DEX, all you need to do is connect your self-custody wallet, meaning there’s no risk of personal data being misused or stolen.
More control over your crypto. “Not your keys, not your coins” is a famous adage in crypto that has proven itself true over and over. In crypto, your “private key” is the password that unlocks access to your self-custody wallet. If you leave your crypto on a centralized exchange, it means that ultimately, you don’t own the crypto that’s in your account because you don’t control the private keys on a centralized exchange. Using a self-custody wallet on decentralized exchanges, though, guarantees that you’ll always maintain full control over your crypto.
Cheaper and more transparent trades.
Using a centralized exchange means paying fees that can be as high as 3.99%. DEXes allow users to make the same trades for markedly less. Using Matcha, 0x Lab’s DEX aggregator, there are zero fees on most trades. On Uniswap, the most popular DEX, trades cost just 0.3%. Additionally, because DEX order books are transparently recorded on the blockchain, there is less risk of falsified prices or trade volume manipulation.