The DEX Big Thing

DeFi users’ main tool for decentralizing finance

Decentralized exchanges — or DEXs — are peer-to-peer marketplaces where crypto traders get to execute transactions directly, without any need for a custodian or an intermediary. There is no third-party fund management and guaranteed no stopovers for the transactions — all of them are facilitated and executed via smart contracts, like a well-oiled machine.

DEXs were envisaged as the next step in both financing and decentralization. They present a new way of value allocation without the requirement for any authority posing as an overseer which authorizes trades. All traders — buyers and sellers — are connected directly and via the marketplace itself. And most of the time, a DEX would be a non-custodial marketplace, meaning that all of the users get to keep control of their private keys. Additionally, a DEX would not require a user to present or submit any personal information, such as an email, or an address, which means that privacy is guaranteed throughout.

DEXterity is Key

The concept of a DEX, and the appearance of the first such exchanges, is what attracts most people to the broader idea of DeFi, or decentralized finance. The ability to have liquidity and access problems solved in such an elegant manner, all the while offering users better rates than centralized exchanges ever could, is what makes them so alluring to users.

To put it bluntly — a DEX possesses all the dexterity a centralized exchange does not (pardon the pun).

Thanks to the smart contract basis, which enables such a dependable trust-less environment, no intermediaries are needed. This means that there is no chance of human error, let alone any third-party tampering or misbehaving. No banks or other financial institutions stand to make a profit from operating such an exchange, meaning that a for-profit motivation has been almost completely taken out of the equation. All this mentioned above is true, however, only in the case that the DEX core has been developed with the utmost care and precision on the part of the dev team that created the DEX.

Additionally, not having a centralized operator means that all transactions are anonymous, always, and that no KYC procedure is involved; most importantly, it means that all of the funds are always with the users and are directed by the users. The users — or traders — are in charge and in control at all times, guarding their funds as they best see fit.

How Does a DEX Work?

DEXs are, as mentioned, built on top of blockchain-powered networks that enable the usage of smart contracts. Essentially, this means that traders interact with smart contracts themselves — directly on the blockchain — to use and operate a DEX.

With anonymity and privacy reigning supreme in the world of DEXs, using one such decentralized exchange does not involve a sign-up process. All that a trader would need is a wallet that is compatible with the exchange network powering the DEX. This means that anyone with an internet connection and a device made in the past ten years, for example, a smartphone, can access and benefit from the financial services a DEX offers. The only trade-off here would be the transaction fee which covers the trade and enables the DEX to operate smoothly.

On the flip side, this transaction fee trade-off is what could present an obstacle for some users — many DEXs out there charge high fees for any and all transactions.

Once the desired DEX is chosen and a compatible wallet is in use, all it takes to start trading is to fill the wallet with the DEX’s native tokens — seeing as how these will be used for trade. And then — it’s go-time.

Advantages of Using a DEX

Trading on a DEX can present the traders with swaths of benefits.

For starters, unlike centralized exchanges which have to individually vet each token to ensure regulatory compliance, DEXs can include any tokens minted on the underlying blockchain. This means that traders can, for example, access projects earlier, exit earlier, and also means that more projects would get the ability to try and access funding.

Furthermore, a DEX’s prime value is privacy. In contrast to centralized exchanges, a DEX has no need for a KYC procedure and no personal information is gathered on users. Additionally, users possess another layer of security simply due to the fact that their funds are not stored on the exchange, but rather stay with them at all times. If the DEX gets hacked or attacked in any other way — the funds are safe.

Finally, on a DEX, users can earn income passively as well by providing liquidity to the pools. By locking both of the tokens composing a pair, and adding liquidity to it, a user can earn a fee from every swap happening on this pair!

Outlook

Ever since the first DEXs appeared, it was clear that they would be here to stay. With the soaring popularity of decentralized financial services, and blockchain technology application potential as such, using a DEX to solve one’s liquidity problems — appears to be more reality than a dream.

And, given all of the advantages, the DEXs have over centralized exchanges — their allure is almost all but guaranteed to grow. However, due to there being no KYC procedures and AML check-ups, it is possible that regulators around the world will weigh-in in on DEXs soon. Still, this is a golden opportunity for the market itself, and us as users, to shape the wider narrative and shift the paradigm — make the regulators see the quality of the tech and the benefits it brings and get them to listen.

The best way to do this is to use the tech and spread the good word! With the underlying technological groundwork enabling the DEXs to operate evolving so rapidly — and with self-executing smart contracts enabling more use cases in the future — we will certainly have what to talk about.

æternity Blog