What is a Decentralized Exchange (DEX)? Your Guide to DeFi & Everything You Need to Know About a DEX

Oasis Network
Oasis Foundation
Published in
7 min readNov 22, 2021

--

Community translations: Ukrainian | Bengali | Hindi

In this guide, we review the key differences between a Decentralized Exchange and a Centralized Exchange, how DEXs are leading the charge, and the ultimate impact they’re projected to have on DeFi and Finance as a whole.

The vast world of cryptocurrencies offers newfound opportunities for individuals and experienced investors alike to acquire digital assets that are fueling a fundamental change in finance. The trading of these digital tokens is executed through exchanges, which are online marketplaces that allow for the facilitation of transactions.

Bitcoin was the first cryptocurrency ever created, where genuine interest truly began picking up in 2010. Soon after a website named Bitcointalk launched, providing a floating exchange rate for Bitcoin and cementing itself as the world’s first cryptocurrency exchange.

Over the years, several and far more advanced concepts of exchanges have emerged that have given investors more choices to acquire and sell their tokens, mostly sparked by DeFi (decentralized finance). Today, CEXs (centralized exchanges) and DEXs (decentralized exchanges) are vital instruments that power the blockchain ecosystem today.

What is a CEX? (Centralized Exchange)

CEXs are the most commonly used platforms for buying and selling cryptocurrencies, boasting high liquidity and low trading fees. They’re considered easy to use and allow users to trade tokens for fiat currencies or between other digital assets through a traditional order book — they also offer other features such as staking, derivatives/futures trading, and more.

These exchanges typically serve as custodians for tokens, where they hold the private keys and store user funds on their platforms — this eliminates the need for users needing to worry about losing their funds housed on a physical device or remember their private keys.

Examples of some of the largest CEXs today are Binance, Huobi, Coinbase, Kraken, Bithumb, and Bitfinex.

Many CEXs offer various security measures that have been put in place, such as KYC (Know Your Customer) and Google 2FA, in order to protect your account from hackers and cyberattacks.

While CEXs completely dominated the blockchain trading landscape in its earlier years, the emergence of DEXs has eaten away at their market share, reeling in a new era of decentralized trading.

What is a DEX?

DEXs are exchanges where you can trade various crypto tokens through smart contracts, or automated codes, eliminating the need for a middleman to complete and monitor transactions. These types of exchanges aren’t custodians, so they give you complete control of their private keys.

Users can interact with a DEX via a decentralized and non-custodial web wallet (i.e. MetaMask, Coinbase Wallet), where permission to access the smart contract is initiated. Although they require a slightly higher learning curve, the functionality and interfaces of today’s DEXs are quite smooth and seamless, making it often worth the extra steps.

A few examples of the largest DEXs today by trading volume are Uniswap, dYdX, PancakeSwap, and Sushiswap. Many of these DEXs offer trading across various different major blockchains, such as Ethereum, Binance Smart Chain, and Polygon (Matic), to name a few.

DEXs vs. CEXs: Key Differences

To better understand the use cases for each exchange, it’s important to highlight the key differences between the two. These days, although CEXs remain the dominant force in the crypto space, DEXs are picking up steam and becoming far more used thanks to their attractive features and functionalities.

DEXs offer several improvements over their CEX counterparts, including:

  • Multi-chain swapping functionality to leverage lower fee options
  • Increased anonymity when trading (no KYC)
  • Allowing users to maintain full control of their own funds (higher security)
  • More widespread DeFi and NFT integration

Custodial vs. Non-custodial Wallets

In order to hold and store your cryptocurrency tokens, you’ll need to use a wallet that is custodial or non-custodial. But what are the key differences between these two wallets, as well as the associated pros and cons?

Custodial wallets are where a third-party entity has control of your private keys, typically a CEX, where the majority of them are web-based. Users must place their trust in these entities to hold and ensure the security of their funds — luckily, many of these exchanges hold a majority of their platforms’ funds in cold storage hardware wallets, however, this is not always the case.

On the other hand, non-custodial wallets give the user full control of their private keys, eliminating the need to facilitate trust in a third-party entity but placing complete responsibility on the user to ensure their keys aren’t lost. The most popular non-custodial hardware wallets on the market today are the Ledger Nano S and Trezor Wallet, known for their high security and interactive web apps for elevating the user experience.

Outside of the physical device world, there are also popular Web3 wallets that can be added as extensions directly to your web browsers, such as MetaMask and Coinbase Wallet. These non-custodial wallets are fully decentralized and can interact with DEXs.

For maximum security and control, the recommendation is to utilize a non-custodial hardware wallet. This way — as long as you’ve stored your seed phrase in a private place without exposing it digitally — your funds are safely stored. But using a custodial wallet has its advantages as well — they’re far more convenient and require less responsibility, making them easier options.

The Role DEXs and the Future of DeFi

As DEXs pick up traction in terms of their features and user base, the role they’ll be playing in the future of DeFi becomes much clearer. These exchanges are liberating individuals and communities from the tight grasp of centralized finance and its associated institutions, while also laying the infrastructure for innovative, smooth, and seamless trading amongst existing and emerging advanced blockchains.

They’re also disrupting the mainstream financial world by offering a faster, cheaper, and more decentralized way to trade, as opposed to TradFi (traditional finance) platforms that are often slow and expensive.

But the hidden gem truly lies within multi-chain functionality. It opens the doors to the wider DeFi ecosystem out there. Instead of opening up to a single blockchain network, its users, and projects, DeFi projects can attract users from across the entire blockchain sphere.

Cryptocurrencies represent the future of currency, and DEXs are riding the blockchain wave to create the future of finance.

DeFi & DEX Glossary

Below is a glossary of important DEX and DeFi terminology to know.

  • AMM (Automated Market Maker): The foundation of a DEX that allows tokens be traded in a permission-less manner, using liquidity pools instead of traditional order books
  • Blockchain: A digital ledger or record of transactions that’s duplicated and distributed across a network of different computer systems
  • Dapp (Decentralized Application): Applications that receive their data from blockchain networks and don’t require a central web server to operate
  • DeFi (Decentralized Finance): A form of finance in the blockchain world where users can leverage different financial applications to transact, lend/borrow, earn interest, and more in a decentralized fashion without the governance of a central authority
  • DEX (Decentralized Exchange): A platform to exchange crypto assets via smart contracts
  • Gas: A measurement unit of the computational difficulty that’s needed to execute a smart contract function — a gas fee on a protocol or DEX is typically paid in the network’s native token (i.e. $ETH on the Ethereum blockchain)
  • Liquidity Pool: A pool or collection of different cryptos that are locked within a smart contract — this combined liquidity allows for trades to be executed on a DEX

Oasis Network: Reshaping Next-Generation DeFi

The Oasis Network is the first privacy-enabled blockchain platform that allows for the facilitation of more private and scalable DeFi mechanisms to take place. We’re creating a new financial mechanism called Tokenized Data that allows users to utilize their generated data for staking in order to earn passive income as rewards, enabling a brand new data economy.

Rose Token ($ROSE) is the protocol’s native utility asset that’s used for paying transaction fees, staking, and delegating to achieve network consensus — it’s also a capped supply token where a maximum of 10 billion coins can be issued. The Oasis Web Wallet is non-custodial and allows users to store and stake their $ROSE tokens, with a smooth user interface and advanced security measures — it can even be connected to a Ledger Nano device or added as an extension to Google Chrome.

YuzuSwap is the first Decentralized Exchange (DEX) being built on Emerald, Oasis’ EVM Compatible ParaTime. Taking advantage of the low gas fees, high throughput, and instant finality of Emerald, it includes all the features of a DEX that the DeFi community have come to expect:

  • Swapping between ETH-based and Oasis-based tokens
  • Liquidity pools and pairs
  • Earning YUZU for providing liquidity to pools
  • A voting system for governance of the funds collected with 20% of the transactions fees

To celebrate the launch, Oasis x YuzuSwap is running its first ever DEX-token Airdrop soon! Follow our social media accounts to be notified about the Airdrop when it launches so you can grab your share of 50K YUZU!

--

--

Oasis Network
Oasis Foundation

A privacy-first, proof-of-stake, decentralized network. Learn more at https://oasisprotocol.org/ & sign up to our newsletter at https://oasisl.ink/3ha7bHy