Cryptocurrencies are that they are decentralized currencies. No regulatory bodies control the currencies nor require the involvement of a third party during transactions. The trading of cryptocurrencies takes place in a peer-to-peer marketplace through DEX or a decentralized exchange that facilitates trading in cryptocurrencies. The arrangement helps create a transparent fiscal system where every transaction is visible to everyone using the ledger.
The DEX exchange provides the foundation for DeFi or decentralized finance, and it also serves as the building block for building more sophisticated financial products. Knowing how decentralized exchanges work will help better understand cryptocurrency transactions that would encourage investors to put their money in the right places to maximize the gains.
How do DEX works?
Now that you understand a decentralized crypto exchange, it is essential to know how it works. There are different designs of decentralized exchanges, with each one offering different trade-offs and benefits in terms of scalability, features, and decentralization. The choice of DEX exchange depends upon the nature of the transactions undertaken and many other factors.
The salient features of any decentralized exchange include immutable smart contracts and blockchain technology. Unlike centralized exchanges (CEX) like Binance and Coinbase, the DEX crypto exchange platform facilitates trading by using the exchange’s internal matching engine. Trade execution in DEXs happens through on-chain transactions and smart contracts, and users can maintain full custody of their funds by using their self-hosted wallets when trading.
The vision behind DEX exchanges
The purpose behind the creation of decentralized exchanges is to create a permission-less environment of crypto transactions with seamless accessibility to a blockchain infrastructure from end to end. There would be no central points of failure, and those participating in the exchanges would enjoy decentralized ownership and become a part of the community of distributed stakeholders. A decentralized autonomous organization (DAO) comprising a community of stakeholders governs the protocol’s administrative rights and even votes on critical decisions related to the protocol.
Fees payable to DEX exchanges
Network and trading fees are the two types of fees payable by users of decentralized crypto exchanges. The Network fees relate to the gas cost incurred during the on-chain transactions. In contrast, the trading fees are payable to the token holders, liquidity providers, or a combination of these entities as specified in the protocol of the DEX exchange design.
Decentralized exchanges differ from centralized exchanges as it allows trading in cryptocurrencies only. No DEX will allow trading between fiat and cryptocurrency, so you cannot make more advanced moves like setting limit orders or making margin trades. The exchange handles all these transactions via an order book that sets the price of a cryptocurrency based on sell orders and current buys. Smart contracts are the hallmark of decentralized exchanges that use liquidity pools and algorithms to establish the price of different cryptocurrencies.
