What is a decentralized exchange (DEX)?

DEX is a blockchain-based exchange that allows people to directly exchange encrypted tokens with each other. But it does not store user funds and personal data on the server but performs all operations through smart contracts on the blockchain, which is different from traditional centralized exchanges (CEX). Traders can achieve direct peer-to-peer transactions on DEX without intermediaries. Compared with centralized crypto exchanges, they have some advantages and some disadvantages.

First of all, we need to understand the operating mechanism of CEX and DEX?

Centralized exchange operating mechanism

In centralized exchanges such as Binance and Coinbase, all the core links of transactions, including recharge, order placement, order matching, and delivery, and cash withdrawal, are all completed in the exchange. For example, investors need to provide their bank statements and some identity information then can deposit money to buy cryptocurrencies.

However, traders do not really hold the digital assets but entrust the virtual currency to the exchange for reporting and all transactions occur in the database of the centralized exchange.

In other words, this is similar to a traditional bank transaction service. The customer deposits the principal in the bank, and the bank will give you a bank card, which is equivalent to the existence of a private key in centralized virtual currency exchange. But the bank has ultimate control.

Decentralized exchange (DEX) operating mechanism

Decentralized exchanges use smart contracts to facilitate the transaction of tokens, but they do not actually enjoy the control of tokens. First, orders will be collected into the DEX order pool through authorized smart contracts for other users to view. Other users can choose whether to execute the order. After confirmation, the relevant transaction information will be uploaded to the chain, and the entire transaction process will be completed through a smart contract. Therefore, decentralization such as Uniswap, 1inch, Balancer, SushiSwap all relies on blockchain infrastructure.

DEX has three ways to process orders, they are on-chain order book, off-chain order book, or automatic market maker method.

Advantages of DEX

CEX's wallet stores the funds of all users, and a large amount of funds is vulnerable to hacker attacks. Once a problem occurs, the consequences are disastrous, and Dex is more secure in comparison.

The platform is responsible for providing liquidity for transactions without controlling actual assets.

Decentralized exchanges protect users' personal information, and transactions on decentralized exchanges do not need to provide personal information such as social security numbers or addresses.

Disadvantages of DEX

Compared with CEX, Dex has problems such as slow transaction speed and high cost. Because every transaction record will be recorded in the blockchain network.

Compared with CEX, DEX will not provide corresponding customer service and the user experience is much lower than CEX.