A Decentralized Exchange (DEX) is a type of cryptocurrency exchange that operates without a central authority. Instead of relying on a third party to hold and facilitate trades, DEXs use smart contracts on blockchain networks to enable peer-to-peer (P2P) trading.
Key Features of a DEX:
- Non-Custodial: Users retain full control of their funds since trades happen directly between wallets.
- Permissionless: No need for account creation or KYC (Know Your Customer) verification.
- Transparency: All transactions are recorded on a public blockchain.
- Liquidity Pools: Many DEXs use automated market makers (AMMs) where liquidity providers deposit assets into pools to facilitate trading.
Types of DEXs:
- AMM-Based DEXs – Use liquidity pools instead of order books (e.g., Uniswap, PancakeSwap, Curve).
- Order Book DEXs – Maintain decentralized order books for matching trades (e.g., dYdX, Serum).
- Hybrid DEXs – Combine elements of centralized and decentralized trading for better efficiency (e.g., DeversiFi).
DEXs empower users by removing intermediaries, reducing costs, and ensuring greater privacy, but they can face challenges such as impermanent loss, high gas fees, and limited fiat integration.