What are DEXs? Which DEXs are Popular and How do They Make Money?

There’s no real way to make sure miners or relayers on a decentralized exchange can’t jump in line for orders. Currently, DEX creators are working on potential solutions that involve signatures or collateral, but no concrete solution exists thus far. Decentralized exchanges typically trade at about 10% to 20% of centralized exchange volume, up from the meager 1% in 2018, when we first wrote this article. Still, the https://cryptolisting.org/ vast majority of crypto trading happens through centralized institutions. To some, this is an enormous shortcoming of the cryptocurrency space, building a decentralized future atop centralized exchange providers. Their privacy and non-custody features aligns them with the ethos of crypto, making them an attractive option for most cryptocurrency traders who want to have fully control of their tokens.

What Are Decentralized Exchanges (DEXs) and Which DEXs Are Popular?

On-chain order books enable traders to purchase and sell crypto with the full security of the network as every order and transaction gets uploaded onto the blockchain. However the drawback is that this increases the cost and speed of transactions, and as we know in trading, cost and speed are two important factors for traders. Decentralized exchanges generally try to embrace blockchain’s ethos of “trustlessness” and privacy. For others, that level of responsibility is intimidating, and the risks are concerning. Decentralized exchanges don’t ask American citizens to enter private information, such as social security numbers or addresses, that centralized exchanges are compelled to require as part of the Bank Secrecy Act. Thus far, because DEXs don’t take control of assets, they’ve fallen outside such regulations.

What Are the Different Types of DEXs and How Do They Work?

Transactions made on this type of DEX must be confirmed by miners within the network. Using a DEX, a user must connect their crypto wallet to make trades on the platform. Once the trade is closed, the trading fees are automatically deducted and the crypto assets are added to or subtracted from this wallet. As a decentralized, liquid, and composable digital asset with ubiquitous network effects, MakerDAO is one of the most useful cryptocurrency protocols.

Drawbacks of DEXs

In this way, DEXs allow people to own tokens to use in decentralized finance (DeFi), services that allow them to save, borrow, lend, or trade without going through a bank or other financial institution. To use Uniswap, users need to have an ERC-20 supported wallet setup such as MetaMask or WalletConnect. Users also need ether to cover ‘gas’ — the term used for transaction fees on the Ethereum network.

1. Additionally, it allows for 24/7 trading even when CEXs are down due to overload or maintenance.
2. If you would like to learn more about trading, DeFi, and liquidity pools, there are lots of excellent resources on Swyftx Learn.
3. An in-between solution involves users submitting funds to open-source, verified smart contracts that execute when a match is made and can be canceled at any time.

Decentralized Exchange (DEX): Alternative to CEX platforms

This is how Gains Network is able to support close to 100 different markets with liquidity for all of them. As DEXs operate in a grayzone where it is not owned by a legal entity, if something happens, the user may not be able to receive help from a dedicated customer support. In the worst case scenario where funds are lost, they are not able to go through the standard legal route what is function of expense method to claim for loss of funds. Therefore, it is very important that users only deposit what they are comfortable with losing, in the event that the DEX gets exploited. As DeFi and DEXs advances, the security improves and the chances of exploits is reduced, but it is likely that nothing will remain 100% safe. In an on-chain order book, every transaction is written onto a blockchain.

This prevents funds from being lost due to mismanagement of funds from exchanges and avoids having their funds frozen, or being prevented from withdrawing, or outright taking their funds if they become insolvent. Additionally, it allows for 24/7 trading even when CEXs are down due to overload or maintenance. If you would like to learn more about trading, DeFi, and liquidity pools, there are lots of excellent resources on Swyftx Learn. The main advantages of using a DEX are that you control your private keys, you have access to a large range of altcoins, and you have great privacy and anonymity while making trades. This piece will explain what a decentralized exchange is and how it works. It will also look at how a DEX differs from a regular exchange, and explore the advantages and disadvantages of both.

They facilitate large-scale trading (including margin trading), bridging the gap between fiat currency and cryptocurrency. They also provide liquidity and functioning as an entry point into the crypto market for new cryptocurrency users. Uniswap executes two types of smart contracts on its distributed ledger; an “Exchange” contract and a “Factory” contract. Meanwhile, exchange contracts facilitate the sending and receiving or ‘swaps’ of ERC-20 tokens on the platform.

And even though centralized exchanges can go down for maintenance, on a DEX you can keep trading. A DEX that leverages automated market markets, removing the need for order books, limit/market orders, or other centralized exchange features. A user that trades on Swyftx, for example, deposits fiat currency or cryptocurrency into a wallet hosted by the Swyftx platform. Customer funds deposited on Swyftx are then used to trade on the Swyftx exchange platform and then can be withdrawn to an external wallet by the user.

In January 2019, DEX platforms represented just 0.11% of global trade volume, but that number has since swelled to 14% as of August 2023. The monthly trading volume on decentralized exchanges has grown to over  $40 billion as of August 2023. Decentralized exchanges only work with cryptocurrency assets and not fiat (like USD), as enabling crypto-to-fiat would require involvement with banks. (Dollar transactions can’t settle instantly like blockchain-based ones.) Therefore, you have to already have cryptocurrency assets in order to use a decentralized exchange. When a user wants to trade one cryptocurrency for another, they send their assets to a smart contract.

Unlike it, the market maker system determines an asset’s price dependent on the ratio of coins existent in a respective pool and its supply and demand. When you buy a Bitcoin on Coinbase, for example, it shows up in your Coinbase account, but you don’t actually own and control that Bitcoin yet. You need to request a transfer off Coinbase to an external wallet address that you control before the Bitcoin is really yours. If Coinbase is attacked, slowed down, or has technical issues, you don’t have recourse to secure your Bitcoin. This has been a problem so often with many exchanges that “funds are safe” has become a meme in the community as exchange operators attempt to reassure users in the wake of system problems.