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What Is a DEX In Crypto Trading?

Decentralized Exchange (DEX) is a marketplace that allows transactions between crypto traders without the need of intermediary. Enter now to learn about what is DEX in crypto trading.
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What is a DEX in Crypto trading?

Decentralized Exchange (DEX) is a marketplace that allows transactions between crypto traders without the need of an intermediary.

Think of this as something similar to going online and shopping for an item. You are usually going to have to do this via a marketplace such as Amazon and they are the intermediary that connects you to the sellers and rates those sellers to ensure you are confident about your purchase; With DEX, you can buy those items directly from the source without the intermediary.

The decentralized exchange is conducted with a smart contract and takes place within a blockchain network. A smart contract is a program on a blockchain that is stored and deployed when specific conditions are met between all parties involved.

In order to get a better idea regarding how decentralized exchange works, we need to understand CEX first –
a Centralized exchanges (CEX). are online trading platforms that match sellers and buyers and allow them to trade their cryptocurrencies via an order book. It’s important to note that the CEX platforms are preferred by most of the crypto traders and that the majority of transactions in the crypto market (above 99%) go through CEX platforms; however, the DEX platforms are still preferred by some users, mostly because of the following differences:

Centralized exchanges (CEX)

  • There are companies involved acting as intermediaries
  • They provide a link between cryptocurrency trading and standard currencies
  • The process of buying and selling cryptocurrency is mostly automated
  • A single entity controls all customer accounts, balances, logins, etc.
  • Their main source of revenue comes from customer fees

Decentralized Exchanges (DEX)

  • There are no intermediaries for any of the operations conducted in DEX
  • It works peer-to-peer and matches buyers and sellers
  • The buyer and seller then agree on the terms of the exchange without a middleman
  • Users are always in control of their funds and data
  • Anonymity is maintained given the lack of a single entity controlling the information

What is the main thing DEX solves better than CEX?

The main thing that is solved by DEX is that you are going to be exchanging cryptocurrencies without any intermediary. Even when crypto is not regulated by any specific entity, you still go through a series of steps and your exchange happens through the use of a platform. With DEX, the exchange will take place directly and this means your cryptocurrency will be transferred directly to the other person.

This means that you are going to be abler to forget about the transaction fees that are often part of this process. With that said, the answer to that question is that DEX is mainly about being able to handle crypto transactions without the need for a third party, and it also means they are cheaper.

DEX Advantages

Lower fees
This is the most evident advantage that comes with the use of DEX and this is thanks to the removal of an intermediary. You will deal with fees with DEX but they will be significantly lower than any type of centralized transaction. This is also thanks to automation.

Diversity
With centralized exchange, you are only allowed to engage in transactions with the coins that are officially listed for this purpose. When you make use of DEX, you can trade with coins that are still outside of this list and this gives you more room to play around and exchange other coins that might become very popular in the near future.

Trustless transaction
Given that DEX does not hold your funds anywhere and they go directly from person to person, there is less room for hacks and for any issues to happen with the process.

DEX Disadvantages

Scalability
The number of transactions that you can do with DEX is much smaller as it is going to depend on the network infrastructure behind them. This limits the capacity that you have to perform any trades or transactions within a specific amount of time.

Market liquidity
Due to how Decentralized Exchange continues to be something relatively new and very diverse, the liquidity is still not optimal, but it continues to improve day by day. Just as it happens with all things related to crypto, there is a process that requires patience.

Complicated user experience
While there are advantages to DEX, there are also some challenges for those who don’t understand how decentralized blockchain technology works. The process of conducting a transaction is much simpler and easier to handle with a Centralized Exchange. Therefore, decentralized exchanges are not ideal for beginners in the crypto world. They will eventually become more user-friendly as they become more popular.

How do you interact with DEX?

The first thing you need to do is create a wallet and that process is very similar to that of registering any other type of account online. You need to provide specific information and a password. Once your wallet is registered, you can start the process of engaging in exchanges; Some of the most popular Decentralized Exchanges include:

  • Zerion
  • Pancakeswap
  • Coin98
  • Bisq
  • Loopring
  • Uniswap
  • Balancer

DEX Fees

The cost of swapping tokens in DEX is generally much lower than CEX as we mentioned earlier, but there is also going to be a difference depending on the DEX you decide to use. For example, Uniswap has a 0.3% fee while pancake swap has a 0.2% flat fee. Most of the DEXs available will hover between 0.2% and 0.4%.

These fees are substantially lower than those changed by centralized exchanges. This is mainly due to the fact that there is no specific entity regulating and monitoring these transactions. Centralized transaction entities are often going to need to handle more expenses.

The future of DEX

Some experts are saying that the future of cryptocurrency is going to depend on DEX and that is where people are headed in order to make the most out of their exchanges. The phenomenon keeps gaining momentum even if it is still considered small when compared to CEX transactions. The coming years are going to be crucial to determine how things will end up for DEXs.

The future of DEX is directly linked to the future of the cryptocurrency world as a whole. This is the main reason why so many people are now getting involved and considering this to be one of the best ways to approach the crypto world.

Final thoughts

Getting involved in the world of DEX exchange can become a very profitable activity if you know what you are doing. It is very important to be able to do this properly and it all starts with the basics that you have learned in this publication. Please do keep in mind that this is a very complex topic that requires vast technical knowledge. The good news is that you can engage in DEX exchanges without having to become a technical wizard in the process. This is also one of the reasons why it is such an appealing way to get involved in the world of cryptocurrency.

 

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