What is a DEX and How Does it Work?

Jun 13, 2022
4 min read

The Defi and NFT markets have undergone major development changes in recent years. The volume of TVL in these markets continues to grow every year. As competitors to the traditional financial system, decentralized platforms have played an important role in the development of the Defi market.

The structure of management, trading, and profitability in DEX is very different from the mid-level platforms in the financial world. The Defi and DEX markets are evolving so fast that many users do not have the time to find the required information and answer questions such as: what is a decentralized exchange, and what is the difference between a centralized platform and a decentralized platform?

In this article, we will discuss in detail everything you need to know about decentralized exchange.

What is a Decentralized Exchange?

Let's start with a simple question: what exactly is DEX? Decentralized exchanges (DEXs) are Defi platforms that use blockchain technology and networks to allow users to perform cryptographic activities. They have no governing body and no control over users' finances.

OK, that's very clear. But what exactly is DEX in crypto and how does it work? DEX can be created automatically with smart contracts or automatically, i.e. with the involvement of engineers and community support. The real estate exchange function is designed to match requests to buy/sell digital goods. In addition, some traders also used the possibility of stockpiling and farming.

DeFi's most popular blockchain network is Ethereum. The exchange enabled by the BNB Smart Chain network is gaining popularity due to the high commissions of the Ethereum network. Changes running on the Ethereum network use ETH itself and ERC-20 tokens. The exchange in the BSC network supports the BEP-20 standard.

How Does a Decentralized Crypto Exchange Work?

With a regular cryptocurrency exchange, you first create an account and meet the terms of the site "know your customer." After investing or connecting to your existing crypto wallet, you can buy, sell, and trade cryptocurrency for instant trading or build long-term investment portfolios.

In a central cryptocurrency exchange, you connect your cryptocurrency wallet to software that runs on the DEX website. If you want to buy or exchange crypto goods, just specify what you want. The country's divided exchange app tells you the price, and if you agree, you authorize the transaction. They never sign up, provide a name or email address, or create an account.

DEX cryptocurrency exchanges are distinct from you and each trader. Instead, they use automated market developers, or AMMs, to provide you with coins and tokens from a payment location—a certain amount of confidential money given to other users over a period of time. If you buy cryptocurrencies in a separate division of the country, you are buying a pool of liquidity.

The AMM approach entails borrowing money from the lending funds to join the liquidity pool. Your bitcoin funds can be used for a week, a month, or any other period of time. You can get your money back at the end of the term, as well as a portion of the liquidity pool's transaction fees. It's similar to investing in government bonds.

You have more control over how you engage in spending pools with a complex DEX. You can only give tokens within a specified price range, for example. Traders with a lot of experience tweak these options to maximize their profits.

Pros of DEX

Anonymity: No registration or Know-Your-Customer (KYC) is necessary.

Security: DEX does not hold users' funds; hence there is no financial risk of robbery or the exchange collapsing;

Lack of a single entry point: Using a dispersed ladder decreases the danger of burglary for hackers and makes attempts unfocused.

Cons of DEX

Limited features: lack of margin trading, stop loss setting, etc.

Low liquidity: Because liquidity pools are smaller than centralized exchanges, there is a considerable risk of slippage.

Lack of support: Personal management and technical assistance are both lacking.

Which Decentralized Exchanges Are the Best?

Uniswap and PancakeSwap are the top DEXs, according to CoinMarketCap and CoinGecko's rankings of Defi exchanges.

UNISWAP

Uniswap is a financial mechanism that allows digital currency to be exchanged. Uniswap is also the name of the business that created the protocol in the first place. Through the use of smart contracts, the protocol enables automated transactions between crypto-asset tokens on the Ethereum blockchain.

PancakeSwap

The Automated Market Maker (AMM) methodology is used by PancakeSwap, a DEX on the BNB chain. This implies that, while you can trade digital assets on the site, there is no order book where your order is compared to others. You're instead trading liquidity pools.

SushiSwap

SushiSwap is a unique cryptocurrency exchange that has revolutionized Defi platforms and surpassed PancakeSwap in many ways. The forum allows users to trade with digital currencies and use a variety of paid and effective methods.

1inch

1inch is a unique cryptocurrency platform based on processes and procedures. Crypto exchange algorithms are based on analytics and search offers that are very profitable for users in terms of investment and profitability.

Curve Fiance

Curve Finance (CRV) is another unique presentation of the internationally traded financial market, focusing on stable and slightly volatile assets. In other words, a complete platform focused on stablecoins and their trading.

Conclusion

The DEX is the heart of the cryptocurrency ecosystem, allowing users to trade digital assets directly with one another without the involvement of intermediaries. The use of DEX has risen in recent years as a result of its ability to provide fast cash distribution of newly issued tokens, smooth boarding information, and democratic trading and cash offers.

It has to be seen whether DEX will attract a significant amount of trading activity and whether the present DEX projects will support long-term growth and institutional acceptance. DEX, on the other hand, is projected to remain a vital component of the cryptocurrency ecosystem, with better performance, smart contract security, administration infrastructure, and user experience.