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A decentralized exchange, or more commonly a “DEX”, is one of the most fascinating aspects of the DeFi revolution. As you may already know, DeFi, is a movement wherein developers create decentralized alternatives of various traditional legacy financial institutions and products. The DEX is the decentralized version of an exchange, such as a crypto exchange. Before we answer the “what is a decentralized exchange” question, let’s learn about traditional exchanges and its many flaws.
Centralized cryptocurrency exchanges are often the first point of contact that people have with the crypto world. The chances are that if you have cryptocurrency, you must have bought it from one of these exchanges. The exchanges act as a portal between the “real” world and the crypto world.
Now, don’t get us wrong. While they have plenty of flaws, they certainly have some advantages, as well.
While token prices in the crypto market have been sleepily drifting sideways, for the most part, decentralized finance (DeFi) has been pumping and is currently the most exciting place to be. And decentralized exchanges (DEXs) are part of that ecosystem.
A DEX, or decentralized exchange, is mainly a type of cryptocurrency exchange. It operates like a stock exchange, except it is run by a smart contract on the Ethereum blockchain that enforces rules and executes trades. Users can trade cryptocurrencies and DEXs do not require a centralized authority to operate, but they do need access to a reliable source of liquidity to service their users.
To better understand how they operate, let’s compare a DEX to a centralized exchange (CEX).
Financial exchanges are where users buy and sell financial assets. Traditionally, the CEX takes orders from buyers and sellers and takes custody of their assets. DEXs do the same thing but without...