Furthermore, DEXs allow users to maintain full custody of their funds via their self-hosted wallets during trading.ĭEX users are typically required to pay two types of fees-network fees and trading fees. Whereas in centralized exchanges (CEXs), such as Coinbase or Binance, the platform facilitates trading using the internal matching engine of the exchange, DEXs execute trades through smart contracts and on-chain transactions. One of the main benefits of DEXs is the high degree of determinism achieved by using blockchain technology and immutable smart contracts. DEX aggregators, which parse through multiple DEXs on-chain to find the best price or lowest gas cost for the user’s desired transaction, are also a widely used category. The two most common types are order book DEXs and automated market makers (AMMs). There are several DEX designs, each offering a different benefits and trade-offs in terms of feature-sets, scalability, and decentralization. In addition, as user funds don’t pass through a third party’s cryptocurrency wallet during trading, DEXs reduce counterparty risk and can decrease systemic centralization risks in the cryptocurrency ecosystem.ĭEXs are a cornerstone of decentralized finance (DeFi) and serve as a key “money LEGO” upon which more sophisticated financial products can be built as a result of permissionless composability. DEXs substitute intermediaries-traditionally, banks, brokers, payment processors, or other institutions-with blockchain-based smart contracts that facilitate the exchange of assets.Ĭompared to traditional financial transactions, which are opaque and run through intermediaries who offer extremely limited insight into their actions, DEXs offer complete transparency into the movement of funds and the mechanisms facilitating exchange. A DEX (decentralized exchange) is a peer-to-peer marketplace where users can trade cryptocurrencies in a non-custodial manner without the need for an intermediary to facilitate the transfer and custody of funds.
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