A decentralized exchange (DEX) is an automated cryptocurrency market that does not require a third party to manage the order book or hold funds. Crypto users can exchange funds directly and anonymously.
Majority of DEXs do not yet provide fiat exchange services and only deal in cryptocurrency. Instead of using order books like CEXs, they have “liquidity pools” for each trading pair they offer. The pools are managed by smart contracts and are algorithmically balanced. Investors lend money to the pool in exchange for trading fees and bonus tokens.
Liquidity transfers via a DEX between wallets and smart contracts are documented on the blockchain so that everyone can confirm the transactions. Contrast this with CEXs, which do not record transactions on the blockchain and only record token ownership when funds are withdrawn into a cryptocurrency wallet.
DEXs necessitate a higher level of personal responsibility and ownership than most crypto and fiat exchanges because anyone, including scammers, can create and sell tokens on a DEX without need a permisson. CEXs typically vet projects before allowing them onto their platforms, but DEXs lack the centralized authority to do so. This is both an advantage and a disadvantage, because truly brilliant projects usually appear first on DEXs at lower prices than when they appear on CEXs.
