A Decentralized Exchange (DEX) is a peer-to-peer platform allowing users to trade cryptocurrencies directly without intermediaries, using smart contracts for transaction facilitation.

Understanding Decentralized Exchanges (DEXs)

A decentralized exchange (DEX) operates as a peer-to-peer marketplace, enabling users to engage directly in trading activities without the need for a central authority to hold or manage their funds. This innovative platform ensures that users retain full control over their digital assets, trading directly from their personal wallets.

The Mechanics of a DEX

DEXs leverage smart contracts—self-executing contracts with the terms of the agreement directly written into code—to automate and facilitate trading processes. These platforms often utilize liquidity pools and incentivize users to become liquidity providers (LPs) by depositing assets to earn transaction fees from trades.

CEX vs. DEX: The Key Differences

Automated Market Makers (AMMs)

AMMs are integral to DEXs, as they provide liquidity and determine asset prices through a protocol that automates the market making process, contrasting with traditional order book systems.