The decentralized exchange (DEX) is one of the most exciting tools in DeFi. A DEX creates an avenue for people to trade (or “swap”) cryptocurrencies and other digital assets on a peer-to-peer basis using an open source protocol.
How does DEX trading work?
- Enables peer-to-peer trading of digital assets
- Uses smart contracts and the blockchain for orders & settlement
- Enhances security with self-custody
- Anyone, anywhere can access DEX trading
While DEX trading enables many new DeFi opportunities, including added security layers, it may not provide the same level of liquidity as a centralized exchange like Coinbase Pro.
What exactly is a DEX in Crypto?
DEX Definition: A decentralized exchange (DEX) is an online exchange where users can swap digital assets on a peer-to-peer basis while maintaining ownership and control of their cryptocurrency.
There are 3 general types of DEX trading:
- An order book DEX uses onchain and/or offchain order books & settlement.
- Automated Market Makers (AMM) increase DEX liquidity using smart contracts, algorithms, and incentivized liquidity providers (LPs) to facilitate peer-to-peer trading orders.
- DEX Aggregators were developed to improve DEX liquidity, decrease slippage, and deliver the best fees by aggregating the orders and liquidity of multiple DEXs.
DEX vs. CEX
While both decentralized exchanges (DEXs) and centralized exchanges (CEXs) enable online crypto trading, they also exhibit some major differences, including:
- DEX trading uses peer-to-peer order matching algorithms.
- CEX trading uses a centralized exchange order matching engine to match buy & sell orders.
- On a DEX, liquidity is provided through the peer-to-peer system, where users share in the trading fees and earn more for staking Liquidity Provider (LP) tokens.
- On a CEX, liquidity is provided by Market Makers who are traders that profit from the spread and/or by using limit orders in return for lower CEX trading fees.
- DEX fees are lower than CEX fees across the board but network fees, particularly Ethereum gas fees, can quickly eat away at profits.
- CEX fees are considerably higher than decentralized exchanges, but users can get some discounts for being market makers or for using the platform's native token for fees.
Learn about the Quadency Liquidity Provider Rewards Program!
DEX Liquidity pools
To ensure liquidity, DEXs provide liquidity pools. Users earn tokens for setting tokens aside in a pooled smart contract for the DEX to use in market making to help increase liquidity.
- Liquidity pools incentivize liquidity.
- Liquidity providers (LPs) stake digital assets (LP Tokens) in a pool.
- LP stakers earn rewards and trading fees for being LPs.
- Earnings are in proportion to how much a liquidity provider has staked.
How to Swap (or Trade) on a DEX
For this example, we’ll use the popular DEX, SushiSwap.
Before you start:
- You’ll need a Web3 (browser) wallet like TrustWallet or MetaMask.
- Set your wallet to the correct blockchain network, such as Ethereum Mainnet or Binance Smart Chain.
- Load the wallet with the asset you want to swap out, and some ETH, for example, for network costs (“gas fees”).
DEX Trading - Simple Steps for Making a Swap
- Launch the DEX app, here we use SushiSwap app
- Connect your wallet (doublecheck you have enough crypto to cover gas fees)
- Select the token you want to swap from and enter the desired amount or click “Max”
- Select the token you wish to swap to
- Doublecheck transaction details
- Click on “Swap”
The transaction generally executes in minutes and will appear in your wallet. If you don’t see it, make sure you have added the token to your wallet by clicking “Add Token” and follow a few simple steps.
SushiSwap’s AMM algorithm will search for the best price trade and let you know the amount you will receive and the fees/network costs.
Decentralized exchanges are a valuable part of the DeFi ecosystem and bring open finance to a new level by connecting peer-to-peer traders in a liquidity-incentivizing model.
- Sophisticated trading strategies made simple, at Quadency.
- Avoid These 5 Common Crypto Trading Mistakes!
- Discover QUAD tokens and start staking!