Since the release of Ethereum, decentralized exchanges, or DEXs, have grown in popularity and are now an essential component of the decentralized finance ecosystem.

Smart contracts and blockchain technology, which enable transactions automatically without the need for a central authority, are the foundations upon which DEXs are based. Improved user control, more privacy, and increased token availability are the primary advantages of this decentralized strategy.

This post will explain what is a DEX, how it operates, and how to utilize one in response to the query.let’s get started. 

What is DEX

A system designed specifically for associating trading of digital currency and virtual assets. Decentralized exchanges function independently of centralized authority in contrast to centralized authority, enabling users to trade crypto assets directly.

DEXs rose quickly in popularity on Ethereum. Decentralized Exchanges are experiencing significant growth, with transactions totaling 217$ billion in the first half of 2021. Furthermore, as of April 2021, the number of Defi traders exceeded two million. 

Users have complete control over their cash and private keys in a DEX. As opposed to centralized exchanges, this essentially removes the need for users to entrust a third party with their assets. Smart contracts and blockchain technologies are used to automate everything.

How DEXs Work

Since 2016, there have been decentralized exchanges or DEXs. They did, however, have two issues: expensive costs and sluggish commerce.

The first Automated Market Maker (AMM) system to function properly was introduced by Uniswap, and that’s when everything changed. To determine asset values and execute trades, this system made use of a notion known as liquidity pools.

The AMM system operates as follows:

• By adding token pairings with similar value to a pool, such as Ethereum and USDT, stablecoins, users increase liquidity.
• Token prices are established by the pool’s smart contract using a straightforward formula that takes into account the proportion of tokens in the pool. ETH is less expensive if there is more of it than USDT. ETH is more costly if there is more USDT than ETH.
• The pool may then be used by traders to exchange one token for another. They can exchange ETH for USDT straight from the pool, for instance.
• The trade is automatically completed by the smart contract, which also modifies the token pricing for the subsequent trade and changes the balance of the pool.

Consider it like a see-saw: as one token rises, the other falls. The smart contract ensures that prices are reasonable and maintain equilibrium.

How many types of DEXs

Let’s now discuss the many DEX kinds. Decentralized exchanges come in four basic varieties, and they all function differently. Some of them are:

• Order Book-Based DEXs
• Automated Market Maker (AMM) DEXs
• Hybrid DEXs

Order book-based DEXs

Order book-based decentralized exchanges (DEXs) function very similarly to conventional exchanges. To match buy and sell orders, they also employ an order book that contains buyers and sellers. As a result, their liquidity may be lower than that of the centralized exchanges.

AMM DEXs:

AMM DEXs operate differently from traditional exchanges in that they rely on liquidity pools rather than order books. Token pairings may be included in these pools, and smart contracts set the pricing according to the proportionate ratio of the tokens. SushiSwap and Uniswap are two examples.

Hybrid DEXs:

It is important to realize that every kind of DEX is distinct and has benefits and drawbacks. Although they are simple to use, order book-based DEXs might not be as liquid as we would want. AMM DEXs are easy to use and provide constant liquidity, however they have issues with price slippage. Then there are hybrid DEXs, which offer a combination of both qualities that various traders want.

Well-known DEX Platforms that are common in the crypto ecosystem

The user base of several decentralized exchanges has increased. Some of the most well-known DEX platforms are as follows:

• Uniswap: A groundbreaking DEX based on AMMs. This platform is renowned for the way it approaches trade and liquidity provisioning.
• SushiSwap: This community-driven DEX provides a unique trading experience by emphasizing user involvement and administration.
• PancakeSwap: This DEX, which is based on the Binance Smart Chain, provides one of the easiest and most affordable platforms for trading tokens. Its user interface is among the best as well.

Main Steps How to Start Using a DEX

Once you have the feel of the functionality and interface, using a decentralized exchange is rather simple. Keep in mind that practically every sort of DEX operates in the same way. There aren’t many differences.

Here’s a step-by-step guide on how to use a DEX:

• Create a Wallet for Cryptocurrencies: Make use of a safe wallet that is compatible with the DEX’s blockchain. The most widely used wallet is Metamask.
• Link up with the DEX: To connect to the DEX platform, use the wallet’s interface.
• Choose the tokens you wish to exchange: Select the token you wish to exchange it for let’s say Bitcoin and the token you have in your wallet, such as Ethereum.
• Execute the trade: Click “Swap” or the relevant button on the exchange you’re using to finish the procedure after you’ve verified all the information, including the fees, is accurate.

How DEX change the economy

When trading cryptocurrencies, decentralized exchanges, or DEXs, provide a number of benefits over centralized exchanges. This post is the second in a series on DeFi (decentralized finance). Due to their connections to conventional institutions, websites like Coinbase and Bitstamp made purchasing cryptocurrency simple after my initial encounter with it.

These centralized exchanges appeared trustworthy at first that is, until they ran into serious problems. A breach on Mt. Gox in 2014 resulted in the loss of roughly 850,000 bitcoins. Users lost a lot of money on other exchanges like Bitstamp and QuadrigaCX due to hacks or shutdowns.

Even if a lot of centralized exchanges are functional today, they have drawbacks. They have to have restrictions on order quantities and adhere to stringent know-your-customer (KYC) guidelines. Furthermore, consumers have to have faith in these businesses’ financial stability, which worries some cryptocurrency aficionados.

Final Remarks:

The key lesson is that DEXs function in an anonymous and unreliable manner while offering all the same services as centralized exchanges. Thanks to technology, this is now possible outside of any regulated business, giving more people access to these financial services.