What Is a DEX? How Decentralized Crypto Exchanges Work

DEXs charge users much lower fees than their centralized counterparts, but can be much more difficult to navigate and use.

Updated Nov 16, 2022 at 6:32 p.m. UTC

Decentralized crypto exchanges (DEXs) are blockchain-based apps that coordinate large-scale trading of crypto assets between many users. They do that entirely through automated algorithms, instead of the conventional approach of acting as financial intermediary between buyers and sellers.

The algorithms that DEXs use are examples of smart contracts. They are pieces of code written on top of blockchain networks like Ethereum that trigger various outputs when given certain inputs.

The idea behind a DEX is "disintermediation," which means removing middlemen to allow regular people to do business directly with each another. A DEX doesn't offer custody of users’ crypto assets. Instead, users directly hold all their assets in their own wallets at all times.

The largest crypto DEXs had begun to challenge some of the largest centralized exchanges (CEXs) in terms of trading volume by late 2021, according to a report by global accountancy KPMG. Just as exchanges are the largest crypto firms, DEXs are the largest decentralized organizations.

Typically, DEXs do away with conventional exchange order books – where buyers and sellers are matched based on order prices and volume – in favor of "liquidity pools." These are pots of crypto assets sitting under the surface of the exchange, waiting to clear any buy or sell orders that appear. The assets in the pool are sourced from investors, who deposit them in order to earn a yield from transaction fees charged to users of the pool.

The largest DEX is Uniswap, which was created on the Ethereum blockchain in 2018 by a former mechanical engineer who had learned to code only after getting laid off by Siemens the previous year. By late 2021, it was processing transactions worth more than $1 billion each day.

As of February 2022, Uniswap’s version 3 protocol was handling almost $2 billion in trading volume on some days, according to CoinGecko data. It typically manages around three times the volume of its closest DEX competitors, such as PancakeSwap, which usually see $300 million to $600 million in daily volume.

This article was originally published on Feb 11, 2022 at 4:01 p.m. UTC

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Benedict George is a freelance writer for CoinDesk. He has worked as a reporter on European oil markets since 2019 at Argus Media and his work has appeared in BreakerMag, MoneyWeek and The Sunday Times. He does not hold any cryptocurrency.


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