A Decentralized Exchange or DEX is a cryptocurrency exchange that does not have centralized control or centralized existence. Rather such exchanges exist on individual blockchains and are anonymous which means you do not have to provide any KYC documents to use them.
These exchanges are built on the philosophy that crypto exchanges should be private, anonymous, and free from any centralized control, whether individual, corporate, or government. As a result, decentralized exchanges use blockchain virtual machines like EVM to ensure that there is no centralized dependence on any hosting or server.
How Do DEXs Work?
Decentralized Exchanges use smart contracts to ensure that the processes and transactions are free and fair.
DEXs are not cross-chain compatible which means that every blockchain has its separate set of DEXs (whether one or many). For example:
- Ethereum has Uniswap, and Pancakeswap among many others.
- Solana has Raydium
- Cardano has Minswap, and Wingriders among many others.
- Algorand has Tinyman.
Benefits of Using Decentralized Exchanges
Decentralized Exchanges provide you with the following benefits:
- Privacy: Smart contracts are more private, do not require any KYC, and protect your metadata.
- Easy Access: Anyone with a wallet can access a DEX and you can use it without any registration or approval.
- Self-Custody: Since cryptocurrencies remain in your wallet all the time, you do not have to worry about them being locked.
- Censorship Resistance: Decentralized Exchanges cannot be censored banned or forced to shut down since they do not have any single existence or a centralized server.
Some Disadvantages
- Single Blockchain: Decentralized exchanges only work on single blockchains. Though there are some cross-chain DEXs, they still operate within ecosystems such as EVM-based chains.
- Low Liquidity: DEXs have a bit of lower liquidity than CEXs which may cause your transaction to remain stuck for some time.
- Steep Learning Curve: DEXs are not beginner-friendly and require a steep learning curve to be able to use them.
- Speed: The speed of a DEX relies on the speed of the blockchain on which it is built.
- Gas Price Volatility: Transaction fees on DEXs vary a lot because of crypto price volatility.
