DEX 101

Understanding Decentralized Exchanges

If you've floated into the Web3 world you've undoubtedly come across these 3 letters, D-E-X. Now WTF is a DEX? Is it an acronym? Is it a meme coin? Can it get me to the moon? Well, let’s find out! In this introduction to DEXs we’ll figure out what they are, how they work, and why you’ll need to use one. 

What is a Decentralized Exchange (DEX)?

In the most basic explanation a DEX, or Decentralized Exchange, is a peer-to-peer cryptocurrency marketplace that allows users to trade cryptocurrencies for other cryptocurrencies with relatively low fees. That meme coin you asked about, you’ll only be able to get it via a DEX. 

While the selections of cryptos are almost endless, fiat money will not be accepted on DEXs. To use a decentralized exchange you will have to procure some cryptocurrency, from a centralized exchange (ex. Coinbase) then you can start diving into DeFi, Decentralized-Finance. 

How do DEXs work?

DEXs are run by smart contracts and assets are provided via liquidity pools. Smart contracts facilitate the trades between wallets as well as stabilize the prices of cryptocurrency on the exchange. We don’t need to get into the weeds on how smart contracts work, just understand that they are programs of self-executing code, that run when predetermined conditions are met, and record transactions directly onto a blockchain.

Liquidity pools (LP) are crowdfunded pools of cryptocurrency that are locked into a DEX’s smart contract. Individuals who decide to deposit assets into liquidity pools are rewarded with LP tokens that you can then swap on a DEX for other cryptos. LPs are DEXs provide liquidity for its user’s trades. Liquidity pools are the key to a thriving DeFi ecosystem and a smooth operating DEX.  

DEXs Remove The Middleman

The use of smart contracts gives users full autonomy over their funds. Coins are moved directly from wallet to wallet through a DEX. Unlike centralized exchanges (CEX) where coins move from one wallet to the exchange’s account (which is responsible for storing and trading all assets and creates a single point of failure in the system) then to another wallet. 

Be aware, with great power comes great responsibility. Transactions on a DEX can not be reversed. There are no customer support lines to call if you accidentally add a 0 to your trade. We all get burned from time to time and it is wise to send a test amount through a DEX if you are using it for the first time, just to get the feel of it.

DEX Advantages 

Since smart contracts have cut out the middle man, two things have happened. Trading fees have been lowered and security has been enhanced.

When trading on a DEX you will still need to pay gas fees but trading fees are roughly 1-3% lower when compared to centralized exchanges. While that might not seem like a lot it can easily add up over time if you are trading between cryptocurrencies regularly. 

Decentralization makes DEXs more secure because there is no single point of failure in the system. This makes DEX less prone to hacks and price manipulation. DEXs cannot stop you from trading and they cannot freeze your accounts. Still, make sure to DYOR before trading. DEXs are open sourced so anyone can add a cryptocurrency to them and there are plenty of rug pulls or scam coins out there.

Slippage

Slippage is another term you will see on every DEX, if not displayed on the swap interface it will be in the settings. Besides stablecoins, cryptocurrency prices are dynamic. The Slippage % is the amount a cryptos price can change before the transaction will be canceled. 

Conclusion

We’ve covered a fair mount in DEX 101. We discovered what a DEX really is, dipped our toes in a liquidity pool, talked about the advantages of using a DEX, and introduced the concept of slippage. If you are ready to start your DeFi journey, Uniswap, 1Inch, and Sushiswap are some popular DEXs to try. Connect your wallet and swap away my fren.

Using a DEX opens up the entire Crypto universe to your wallet. DEXs are where you’ll find the next x100 token, enter into DeFi, and are a pillar of the Web3 economy.