What are decentralized exchanges (DEX)?

Decentralized exchanges (DEX) are cryptocurrency trading platforms that operate without a central authority or intermediary. Instead of relying on a company that holds users’ funds and matches orders, a DEX uses smart contracts—self‑executing code on a blockchain—to facilitate peer‑to‑peer trades directly from users’ wallets. **Key characteristics of DEXs** | Feature | Description | |---------|-------------| | **Permissionless** | Anyone with a compatible wallet can trade without registration or KYC. | | **Non‑custodial** | Users retain full control of their private keys and assets; the protocol never holds funds. | | **On‑chain execution** | Trades are settled on the blockchain, providing transparency and immutability. | | **Liquidity models** | • **Order‑book DEXs** (e.g., dYdX) mimic traditional exchanges.<br>• **Automated Market Makers (AMMs)** (e.g., Uniswap, SushiSwap) use liquidity pools and pricing formulas. | | **Censorship‑resistant** | No single entity can block or reverse transactions. | | **Composability** | DEX smart contracts can be combined with other DeFi protocols (yield farms, lending, etc.). | | **Reduced counter‑party risk** | Since trades are executed by code, there’s no reliance on a central party’s solvency. | **Advantages** - Greater privacy and control over assets. - Lower barriers to entry for global users. - Innovation through composable DeFi building blocks. **Challenges** - Typically higher transaction fees (especially on congested chains). - Slower trade execution compared to centralized exchanges. - Limited customer support and dispute resolution. - Smart‑contract bugs can lead to loss of funds. Overall, DEXs are a core component of the decentralized finance (DeFi) ecosystem, enabling open, trustless trading of tokens directly on blockchain networks.