What are Decentralized Exchanges?

Decentralized exchanges operate through smart contracts, allowing traders to execute orders without intermediaries. Conversely, centralized exchanges are managed by financial organizations such as banks that seek to make a profit. Centralized exchanges dominate the cryptocurrency market due to their regulation, fund custody, and user-friendly platforms that cater to newcomers. Some centralized exchanges even offer insurance on deposited assets, similar to the services provided by banks. 

• Decentralized exchanges enable users to trade directly from their wallets by interacting with smart contracts on the trading platform. 
• Users are responsible for safeguarding their funds and face the risk of losing them if they make mistakes like losing their private keys or sending funds to the wrong address. 
• The most popular decentralized exchanges are built on top of leading blockchains that support smart contracts, typically on layer-one protocols, meaning they are built directly on the blockchain. Ethereum is the most popular blockchain used for building DEXs.

Decentralized exchanges, also known as DEXs, are platforms where cryptocurrency traders can trade directly with each other without the need for intermediaries or custodians to manage their funds. These trades are made possible through a self-executing code called smart contracts.

The purpose of DEXs is to eliminate the need for a centralized authority to monitor and approve trades within a specific exchange. They allow for peer-to-peer (P2P) trading of cryptocurrencies, which connects buyers and sellers of digital assets. DEXs are typically non-custodial, meaning users retain control of their private keys and advanced encryption that enables access to their cryptocurrencies. After logging into the DEX with their private key, users can immediately access their crypto balances without disclosing any personal information like names and addresses, which is appealing to privacy-conscious individuals.

The emergence of automated market makers that solve liquidity-related problems, along with DEX aggregators and wallet extensions, has played a significant role in the growth of the decentralized finance (DeFi) space. These innovations optimize token prices, swap fees, and slippage to provide a better rate for users and fuel the growth of decentralized platforms.