A decentralized exchange (DEX) is an online platform for trading digital assets without the involvement of a middleman. While any type of peer-to-peer exchange can be considered decentralized, this article will focus on platforms that mimic the features of centralized exchanges.
Unlike centralized exchanges, DEXs allow individuals to have full control over their funds. This is made possible through the use of smart contracts, which execute trades automatically based on certain conditions. When using a centralized exchange, users are trusting the company to handle their crypto, similar to a bank handling money.
However, with DEXs, users have direct control over their assets and interact with other traders through the blockchain network. On centralized exchanges, users typically deposit money in either fiat or cryptocurrency, giving up control of the funds. When funds are deposited in a DEX, users maintain full control and do not need to withdraw them in order to use them elsewhere.
On a centralized exchange, transactions do not occur on the blockchain, but rather within the exchange’s own database. This makes the process more streamlined but also comes with the risk of trusting the exchange with your funds. In contrast, DEXs execute transactions on the blockchain, providing more security and eliminating the risk of a centralized entity controlling funds.
While both types of exchanges have their advantages, some users may prefer the streamlined process and wide range of products and tools available on centralized exchanges.
However, DEXs offer increased independence and security, making them a popular choice among those seeking to have full control over their assets. There are also different types of DEXs, with some focusing on assets within a single blockchain and others allowing for cross-chain trading.
