A decentralised exchange (DEX) is a type of cryptocurrency exchange where users can conduct financial transactions involving the trade of digital assets online directly with each other (or peer-to-peer).
This is different from the most common way of trading crypto, whereby users sign up to an exchange and place their buy or sell orders, allowing the exchange to manage these transactions on their behalf. These types of traditional exchanges are sometimes referred to as centralised exchanges (CEXs). It is also common for a CEX to allow users to swap or exchange crypto directly with the platform’s own funds.
One way to look at DEXs is to see them as a peer-to-peer crypto marketplace like Amazon or Alibaba, where users put up their offers, waiting for others to take them.
However, unlike Amazon or Alibaba, DEXs don’t typically determine what is allowable as a trade listing or arbitrate any trading disputes. They merely operate the software (or dApp) that presents the trades and settles the exchanges between buyer and seller. This is usually achieved through automated algorithms and smart contracts or smart agreements that execute transactions when all the conditions specified by the user are met.
Technically, there are several methods for a DEX to perform the functions of crypto trading and they have evolved over the years. In the next section, we take a look at how and why DEXs started out, the different types that can exist and what a common DEX looks like today.
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