Amber avatar
Coin98 Insights
Nơi chia sẻ tất cả những kiến thức Crypto từ cơ bản đến nâng cao, kinh nghiệm đầu tư Bitcoin và các hình thức đầu tư tiền điện tử khác.

What is a DEX? How does Decentralized Exchange work?

A DEX is a type of cryptocurrency exchange that allows for direct peer-to-peer trading. Decentralized exchanges are often built on decentralized protocols and can be powered by decentralized technologies such as blockchain or smart contracts.
Amber avatar
lochoang
10 min read
Published Nov 05 2019
Updated Mar 20 2024
Amber media

Decentralized exchanges (DEXs) are a key part of the cryptocurrency ecosystem, and they offer many advantages over traditional centralized exchanges. In this article, we will discuss what decentralized exchanges are, how they work, and some of their benefits. Let's get started with Coin98!

What is a DEX (Decentralized Exchange)?

A DEX (or Decentralized Exchange) is a type of cryptocurrency exchange that allows for direct peer-to-peer trading. Decentralized Exchanges are often built on decentralized protocols and can be powered by decentralized technologies such as blockchain or smart contracts.

What is a DEX (Decentralized Exchange)?

Unlike traditional, Centralized Exchanges (CEX), Decentralized Exchanges are not subject to the control of a single entity or group. This makes them less vulnerable to hacks, fraud, and other malicious activities. Additionally, Decentralized Exchanges typically offer more privacy and security than their centralized counterparts.

advertising

One of the first and most popular Decentralized Exchanges is the EtherDelta exchange, which was created in 2016. EtherDelta allows users to trade Ethereum-based tokens directly with each other. The exchange is powered by smart contracts on the Ethereum blockchain and many other blockchain platforms such as Binance, Avalanche, Solana,...

How do Decentralized Exchanges work?

A DEX is a type of cryptocurrency exchange that does not rely on a third party to hold the customer's funds. Instead, trades are facilitated directly between users (peer-to-peer) through an automated process. This type of exchange is often considered more secure and private than traditional centralized exchanges, which are managed by a single entity.

Decentralized exchanges typically work by matching orders from buyers and sellers using smart contracts. These contracts are stored on a blockchain – typically Ethereum – and can be executed automatically when certain conditions are met.

Some popular decentralized exchanges include Sushiswap, Pancakeswap, and Bancor. These platforms allow users to trade a variety of cryptocurrencies, including popular tokens like Ethereum (ETH), Bitcoin and many others.

Order book DEXs have two types: on-chain order books and off-chain order books. DEXs using order books often hold open order information on-chain, while users’ funds remain in their wallets.

On-chain Order books

On-chain order books are hosted directly on the distributed ledger: All orders are submitted to the distributed ledger network and are confirmed by the network.

Serum is a decentralized, on-chain central limit order book

Serum DEX is a popular on-chain order book DEX built on the Solana network. The DEX acts as an on-chain central limit order book which is similar to such mechanisms found within traditional finance but is fully decentralized and permissionless, allowing users to circumvent a middle party and interact directly with a smart contract to execute trades from an order book

Off-chain Order books

An off-chain Decentralized Exchange uses a peer-to-peer order book to execute trades. Order books contain information about the trading activity such as the price, volume, expiry date and whether the order is a buy or sell. When someone else sees your order on the order book, they can submit an order to the DEX, and the smart contract will check if the funds are available for the trade. If everything is acceptable, then the trade is made.

An off-chain order book Decentralized Exchange enables trading by combining order books built off a blockchain with on-chain settlement. The aim is to allow traders to enjoy both the benefits of decentralized and traditional trading.

A few examples of off-chain dexes are 0x Protocol, EtherDelta, Loopring, IDEX,…

Automated Market Makers (AMM)

An Automated Market Maker (AMM) is a type of market maker that uses computer algorithms to automatically provide liquidity to a market. AMMs are commonly used in cryptocurrency exchanges to provide liquidity to digital assets.

AMMs use a pricing model known as constant product markets, which keeps the product of prices of all assets in the market constant. This means that when there is more buying pressure on an asset, the price of that asset will increase, but the prices of other assets will decrease by an equal amount so that the product remains constant.

DEX Review

Advantages of Decentralized Exchanges

Advantages of Decentralized Exchanges

DEX are growing in popularity, due to the many advantages they offer users. These advantages include:

Increased security: When you trade on a Decentralized Exchange, your funds are stored in a smart contract on the blockchain. This means that they are much more secure than on a centralized exchange, where hacks are a constant threat.
Privacy: Decentralized exchanges do not require KYC (Know Your Customer) information, so you can trade anonymously if you wish.
Accessibility: Anyone with an Internet connection can access a Decentralized Exchange. This is unlike Centralized Exchanges which often have strict requirements such as being accredited investors.
Lower fees: Decentralized Exchanges typically charge lower fees than Centralized Exchanges. This is because there are no middlemen involved in the process.
Variety: There are many different types of Decentralized Exchanges, so you can find one that suits your needs.
Autonomy: When you trade on a Decentralized Exchange, you are in control of your own funds. This is unlike Centralized Exchanges where the exchange has control over your funds.
Censorship resistant: DEX cannot be censored by governments or other entities. This means that you can trade freely without worry of interference.
Immutable: All data on a DEX is stored on the blockchain, which is immutable. This means that it cannot be changed or deleted, ensuring that your trades are safe and secure.
Trustless: When you trade on a Decentralized Exchange, you do not have to trust the exchange with your funds. This is because your funds are stored on the blockchain and can only be accessed by you.
Global: Decentralized exchanges are available to anyone in the world with an Internet connection. This makes them much more accessible than centralized exchanges which are often only available in certain countries.

Disadvantages of Decentralized Exchanges

There are a few disadvantages of decentralized exchanges that are worth mentioning.

First, they are often less user-friendly than centralized exchanges. This is because decentralized exchanges require users to have a certain level of technical expertise in order to use them.
Second, decentralized exchanges usually have lower trading volumes than centralized exchanges. This means that there may be less liquidity on these types of exchanges.
Finally, decentralized exchanges are often more vulnerable to hackingand other security threats than centralized exchanges. This is because they do not have the same level of security measures in place.

DEX vs. CEX: What are the differences?

The major differences between centralized and decentralized exchanges

There are a few key differences between decentralized and centralized exchanges that are worth noting.

Centralized exchanges require users to deposit their funds with the exchange, while decentralized exchanges allow users to trade directly from their cryptocurrency wallets.
Centralized exchanges match orders from buyers and sellers using their own order book, while decentralized exchanges use an open order book that is maintained by the community.
In terms of popularity, Centralized exchanges currently dominate the market, with the top 10 exchanges accounting for over 95% of all trading volume. However, decentralized exchanges are gaining in popularity, with the top 10 accounting for over 30% of all trading volume.
A Centralized exchange has more liquidity than a decentralized one because it can match buyers and sellers more easily. This is because centralized exchanges are run by a single entity that can control the supply and demand of assets on the platform.
Centralized exchanges are subject to the regulations of the country or region in which they operate, while decentralized exchanges are not. This can make decentralized exchanges more attractive to users who want to trade in less regulated environments.
Finally, Centralized exchanges are subject to Single Point of Failure risk, while decentralized exchanges are not.

Overall, both exchanges are designed to facilitate the trading of digital assets. Centralized exchanges are more common and tend to be faster when it comes to listing new assets and implementing trading pairs. On the other hand, decentralized exchanges offer more security and privacy. You should be careful when it comes to selecting exchanges for your trading activities.

How to use DEX simply

How to buy crypto on Decentralized Exchange

Step 1: Prepare a non-custodial wallet. You can use Coin98 Super App - a self-custody wallet like Coinbase Wallet is required to purchase a Decentralized Crypto Token. Coin98 Wallet is available as a mobile app and browser extension.

Step 2: As part of setting up your Wallet, you will need to choose a wallet name.

Step 3: Securely store your recovery phrase: When you create a new self-custody wallet, you'll be given a recovery phrase that consists of 12 random words. The recovery phrase is the key to your crypto, meaning anyone with your recovery phrase has access to your crypto. Do not share your recovery phrase with anyone.

Step 5: Buy and transfer tokens to Coin98 Wallet.

Step 6: Use your funds to buy Crypto Token in the trade tab.

If you’re using Coin98 Wallet on your mobile phone, you can purchase a Decentralized Crypto Token right in the app by going to the Coin98 Market.

How to earn profit from Decentralized Exchange

The decentralized exchange is still in its early stages, but there are already many opportunities to earn profits. Here are some ways to do so:

1. Provide liquidity

One way to earn profits from a DEX is to provide liquidity. This can be done by creating a trading pair and then adding funds to it. As people trade on the DEX, they will need to buy or sell the currency that you have added to the trading pair. This will result in a small profit for you as the provider of liquidity.

2. Trade frequently

Another way to earn profits from a DEX is to trade frequently. This can be done by taking advantage of the arbitrage opportunities that often exist on these exchanges. By buying and selling currencies quickly, you can earn profits from the price differences that exist between different exchanges.

3. Hold a popular currency

Another way to earn profits from a DEX is to hold a popular currency. This is because people will often need to buy or sell the currency in order to trade on the exchange. As the holder of a popular currency, you will be able to profit from this demand.

4. Be an active member of the community

Finally, another way to earn profits from a DEX as an active member of the community, you will be able to earn a reputation as a trusted user, which can lead to more people using your services and thus more profits for you.

Decentralized Exchange Fees

There are many different types of decentralized exchanges, each with its own fee structure. However, there are some commonalities among them.

Generally, Decentralized Exchanges charge a small fee for each trade. This helps to cover the costs of running the exchange and also provides an incentive for users to trade more frequently.

Some Decentralized Exchanges also charge a listing fee for new assets. This is similar to the listing fees charged by centralized exchanges. The purpose of this fee is to ensure that only quality assets are listed on the exchange.

Finally, some Decentralized Exchanges may also charge a withdrawal fee. This is typically a very small fee that is charged when you withdraw funds from the exchange.

The Future of Decentralized Exchanges

Decentralized Exchanges are playing an increasingly important role in the cryptocurrency economy. Here's why they're so important, and what the future holds for them.

Decentralized Exchanges are important because they allow users to trade cryptocurrencies without having to trust a third party. This is crucial in a world where hacks and scams are all too common. With a DEX, users can be sure that their funds are safe.

What's more, Decentralized Exchanges are often faster and more efficient than traditional exchanges. This is because they're not bogged down by slow bank transfers or other bureaucracy.

Finally, Decentralized Exchanges are important because they help to promote financial inclusion. In many parts of the world, people don't have access to traditional financial services. DEXes can give them away to participate in the global economy.

The future of Decentralized Exchanges is bright. They are becoming more popular and more advanced all the time. In the future, they may even replace traditional exchanges altogether.

Some FAQs about DEXes

Are Decentralized Exchanges safe? Can DEXes be hacked?

The short answer is yes, Decentralized Exchanges are safe. However, there are a few things to keep in mind before using one. Please refer to the above section to understand the disadvantages and advantages of a DEX.

Are Decentralized Exchanges legal?

Yes, decentralized exchanges are legal. They are not subject to the same regulations as centralized exchanges, which means they can operate in more countries. However, there are some risks associated with using a Decentralized Exchange, so be sure to research them before using one.

Do Decentralized Exchanges report to the IRS?

One question that often comes up is whether or not Decentralized Exchanges have to report to the IRS. The answer is complicated, as there is no one-size-fits-all answer. However, there are a few factors to consider that can help you determine if a Decentralized Exchange is required to report to the IRS.

The first factor to consider is whether or not the DEX is registered with the SEC. If the DEX is registered with the SEC, then it is likely that it will be required to report to the IRS.

The second factor to consider is whether or not the Decentralized Exchange offers margin trading. Margin trading is when a user borrows money from the exchange in order to trade with leverage. If a DEX offers margin trading, then it is likely that it will be required to report to the IRS.

The third and final factor to consider is whether or not the Decentralized Exchange allows users to trade directly with each other. If a Decentralized Exchange does not allow users

Conclusion

Overall, Decentralized Exchanges have a lot of potential, but they also come with some challenges. They are more secure and resilient than centralized exchanges, but they can be slower and more difficult to use. Additionally, Decentralized Exchanges may not have the same level of liquidity as centralized exchanges. However, overall, DEXes are a promising solution for cryptocurrency trading.

I hope you have gained a better understanding of decentralized exchanges after reading this article. If you are thinking of trading on a DEX, do your own research to find the best one for you.

Don't forget to comment below if you have any questions, Coin98 is always here to help!