DEXs are peer-to-peer markets or platforms where cryptocurrency traders can do business directly with each other without a central authority or custodian holding or managing their assets.  To facilitate these transactions, "smart contracts," or preprogrammed agreements, are being utilized.

Decentralized Exchanges (DEXs) eliminate the need for a central governing body to monitor and approve deals within an exchange, thus traders are to trade at any time of the day. Peer-to-Peer. The term "peer-to-peer" refers to trading between two parties a buyer and seller of a particular cryptocurrency directly with one another.

TL;DR

• Decentralized Exchanges (DEXs) are peer-to-peer markets where cryptocurrency traders can exchange crypto without a central authority or custodian holding or managing their assets.
• DEXs facilitate peer-to-peer exchanges via "smart contracts” or preprogrammed agreements
• Decentralized exchanges offer many ways to earn, especially yield farming opportunities where users provide liquidity to the exchange and receive rewards in return.
• There are three types of DEXs: Automated Market Makers (AMM), Order Book DEXs, and DEX Aggregators.

Centralized Exchange (CEX) vs. Decentralized Exchange (DEX)

Regulation

Most crypto trades happen on centralized exchanges because people trust them because of regulations depending on the countries that they serve. Centralized Exchanges are also a good starting point for beginners who are looking to trade cryptocurrencies because of the high liquidity and large variety of coins available.

Coins.ph, for example, is a centralized exchange. Since it is regulated by the Bangko Sentral ng Pilipinas (BSP), it is considered one of the safest crypto exchanges in the country, coupled with a low barrier to entry, allowing ordinary Filipinos to start trading and investing in crypto with as little as ₱5.

Keeping things private

When using a DEX, traders will need to have a non-custodial wallet, this allows users to retain possession of their private keys. Upon connecting the wallet to the DEX, traders can access their holdings and trade cryptocurrencies. DEXs benefits the unbanked and those who would like their identity to be anonymous as users do not need to give up any information about themselves to use these services.

Range of Services

A centralized exchange provides services similar to those you would find in a traditional bank. Some centralized exchanges provide services like high-yield savings accounts on various cryptocurrencies, dollar cost averaging strategies and even algorithm trading.

Decentralized exchange, on the other hand, requires users to have knowledge of setting up a non-custodial and keeping their own funds safe. Since DEXs run on smart contracts, once the transaction is approved there is little to no way of getting your funds returned if the user makes mistakes like sending a token on a different network or sending the token to a wrong address.

Types of Decentralized Exchanges

Automated Market Makers (AMM)

Automated market makers(AMM) are one of the key innovations that help solve liquidity problems with DEXs and this attracted a lot of people to decentralized finance (DeFi).

AMM solves the liquidity problem with a smart contract-based platform, think of it as a program that automates the process of providing liquidity to the DEX. AMM relies on other services built on the blockchain to determine the value of assets being traded and in turn triggers the smart contract to reach out to the liquidity pools that the DEX has to match the buy and sell orders.

Two of the most popular AMM today are Uniswap ($UNI) which runs on multiple networks and PancakeSwap ($CAKE) which runs on the Binance Smart Chain

Order Book DEXs

Order books keep track of all available buy and sell orders for each asset pair. A buy order indicates a buyer's intent to purchase an asset at the bid price, whereas a sell order indicates a seller's intent to dispose of an asset at the asking price. The disparity between these two factors determines the market price and order book depth on the exchange.

When it comes to order books DEXs, there are two categories: on-chain and off-chain. Most order book DEXs store user funds off-chain while keeping order data on-chain. By using leverage, or borrowing money from lenders on the exchange's platform. When using leverage for trading, traders borrow funds to increase the size of an existing position with minimal capital, this can increase both the profit potential and liquidation risks in case the position loses.

The primary DEX on Solana ($SOL) is called Serum, which is an on-chain decentralized trading exchange that welcomes integration from other third parties.

Off-chain order book DEX platforms retain their order books off-chain only settle deals on the blockchain, providing traders with the benefits of centralized exchanges. By using off-chain order books, exchanges can save time and money, and users can be sure that their transactions will go through at the prices they expect.

DEX Aggregators

To address liquidity issues, DEX aggregators employ a wide variety of protocols and techniques. These platforms combine the liquidity of many DEXs to reduce slippage on large orders, optimize swap costs and token prices, and give traders the best exchange rate and loan terms in the shortest amount of time.

One of the main goals of DEX aggregators is to protect customers from price changes and reduce the number of failed transactions. Some non-custodial DEX aggregators use liquidity from central exchanges to make the user experience better for their customers.

One such example is 1inch ($1INCH) which is currently the most popular DEX aggregator.

How to start using decentralized exchanges?

Depending on the tokens and network you are looking to trade on, this will ultimately help you narrow down which DEX you should use. Different DEX has their own fees and more often than not, they require their own native token as a transaction fee. For example, if you are using UniSwap as a DEX of choice, you will need to purchase $UNI to pay transaction fees.

The second thing to get is a non-custodial wallet. This can be a wallet via a browser extension or an application on your mobile phone. The most popular non-custodial web 3 wallet is Metamask, the browser extension that allows you to connect directly to a DApp. The mobile application has a browser function that allows you to explore DApps as well.

Once you got your wallet set up with the right network connections, you can begin to transfer your funds over and start trading on your favorite DEX.

Trading on DEX is only one of the function of a DEX, Coins Academy have covered other ways you can use DEX to earn some income.

Continuous Adoption of Cryptocurrencies

Decentralized exchanges provide options to users who might not want to trade on Centralized Exchanges or want to explore other opportunities in the DeFi space. As technology improves and grows, we will see more Smart Contract-driven platforms which can provide opportunities that were never available in the past.

Don’t get left out. Explore the world of DeFi now by joining our Coins.ph community.

Disclaimer: The information and publications in this article are not intended to be and do not constitute financial advice, investment advice, trading advice, or any other advice or recommendation offered or endorsed by Coins.

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