Decentralized Exchange (DEX) is a peer-to-peer (P2P) marketplace that connects cryptocurrency buyers and sellers. In this article, as Kriptokoin.com, “What is a Decentralized Exchange (DEX)?” We will answer the question. In addition, we will touch on other questions about the project.
What is Decentralized Exchange (DEX)?
The Decentralized Exchange (DEX) is a P2P marketplace that connects cryptocurrency buyers and sellers. Unlike centralized exchanges (CEXs), decentralized platforms are not under surveillance. That is, a user remains in control of their private keys when trading on a DEX platform. In the absence of a central authority, DEXs use smart contracts that are self-executing under certain conditions and record every transaction on the blockchain. These secure transactions represent an accelerating segment of the digital asset market. It also pioneers new financial products. The Decentralized Exchange or DEX was created to eliminate the need for any authority to oversee and authorize transactions on the exchange.
How does Decentralized Exchange (DEX) work?
Unlike centralized exchanges, DEXs do not allow exchanges between fiat and crypto. Instead, they only exchange cryptocurrency tokens for other cryptocurrency tokens. Via CEX, you can trade fiat for crypto (and vice versa) or crypto-to-crypto pairs. You can also make more advanced moves such as margin trading or setting limit orders. But all these transactions are done by the exchange through an “order book” that sets the price of a particular cryptocurrency based on existing buy and sell orders, the same method used by exchanges like the Nasdaq.
On the other hand, decentralized exchanges are just a series of smart contracts. They algorithmically set the prices of various cryptocurrencies against each. To facilitate trades, they use “liquidity pools” where investors lock in funds in exchange for interest-like rewards.
Transactions on a centralized exchange are recorded in that exchange’s internal database, while DEX transactions are settled directly on the blockchain.
DEXs are generally built on open source code, so anyone interested can see exactly how they work. This also means that developers can adapt existing code to create new competing projects. This is how Uniswap’s code has been adapted by a number of DEXs that have “swap” in their names, such as Sushiswap and Pancakeswap.
How to use Decentralized Exchange (DEX)?
Using a decentralized exchange does not require registration, as you do not need an email address for these platforms. Instead, traders will need a wallet compatible with smart contracts on the exchange network. Anyone with a smartphone and an internet connection can benefit from the financial services offered by DEXs.
The first step to using DEXs is to decide which network the user wants to use, as each transaction will incur a transaction fee. The next step is to choose a wallet compatible with the chosen network and fund it with the native token. A native token is a token used to pay transaction fees on a particular network.
Wallet extensions allow users to access their funds directly from their browsers, making it easy to interact with decentralized applications (DApps) such as DEXs. These install like any other extension. It requires users to import an existing wallet or create a new one via a seed phrase or private key. Security is made even harder with password protection.
These wallets also get mobile apps. Thus, traders can use DeFi protocols on the go as they come with built-in browsers ready to interact with smart contract networks. Users can sync wallets between devices by transferring them from one to another.
After choosing a wallet, the tokens used to pay the transaction fees on the selected network will need to be funded. These tokens need to be purchased from centralized exchanges. It is easily identified through the stock symbol they use, like ETH for Ethereum. After purchasing the tokens, users just need to withdraw them to the wallets they control.
It is very important to avoid moving funds to the wrong network. Therefore, users should withdraw their money to the right one. With a funded wallet, users connect their wallets via a pop-up prompt. It can be accessed from the “Link Wallet” button in one of the top corners of the DEXs website.
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