Decentralized Exchange (DEX)

What Is a Decentralized Exchange (DEX)?

A decentralized exchange (DEX) does not need users to deposit funds to begin trading and does not keep the cash on behalf of the user. Users instead trade straight out of their wallets. It is a peer-to-peer exchange that allows users to trade cryptocurrency without a mediator.

Trading cryptocurrencies has traditionally required the use of a centralized exchange. CEXs match orders from people who want to buy cryptocurrency with those who want to sell it and vice versa. They are conceptually comparable to stock exchanges. 

However, there are some perceived drawbacks to traditional, centralized exchanges. First, these platforms are privately owned. This means that a third party — with its motivations and interests — is present in the middle of every transaction. In response, these private corporations monitor those transactions and collect and store information on all their consumers. 

This is a straight challenge to one of the pillars of cryptocurrency: the ability for a user to remain anonymous if wanted. Moreover, transactions on centralized exchanges are custodial, which means that the platform owns the item being swapped.

Why Decentralized Exchanges (Dex) Are Considered Better

Decentralized exchanges address both of the difficulties related to centralized exchanges by providing theoretically total anonymity and, notably, non-custodial transactions. This means that the actual asset getting exchanged never goes through the hands of a mediator. 

Many believe that DEXs will be a critical feature of the next wave of crypto growth. However, completely decentralized services (for example, Radar Relay, which is based on the 0x protocol) are still in their infancy, and trade volumes on these platforms are often minimal. 

Furthermore, regulators have indicated that they do not agree with the argument that decentralized exchanges must not be subjected to the same supervision as centralized counterparts because they do not handle assets.