What is a DEX?

A Decentralized Exchange (DEX) is a peer-to-peer marketplace that connects cryptocurrency buyers and sellers. In contrast to centralised exchanges (CEXs), DEXs employ smart contracts that self-execute under set conditions and record each transaction to the blockchain. DEXs also take on a non-custodial framework where you retain control of your private keys and cryptocurrency funds.

Advantages of DEXs

1. Custody

a. DEXs: Non-custodial, traders don’t need to relinquish the control of private keys to transact

b. CEXs: Plays the role of custodians for your funds by controlling your private keys

2. Trustless transactions

a. DEXs: Through smart contracts, execute trades and records them on the blockchain which enables trustless transactions

b. CEXs: Every transaction is overseen and recorded by the exchange

3. Lower fees

a. DEXs: Through the use of self-executing smart contracts, DEXs can offer lower fees

b. CEXs: Due to the existence of a central intermediary, fees are most probably higher

Disadvantages of DEXs

1. Scalability

a. DEXs: Since DEXs function using smart contracts that live on the blockchain network, DEXs are bounded by the limits of the underlying network infrastructure.

b. CEXs: Not bounded by blockchain network infrastructure

2. Smart contract vulnerabilities

a. DEXs: Any Defi protocol is only as secure as the smart contract that powers it. If exploitable bugs are found, it may result in the loss of tokens

b. CEXs: Vulnerabilities exist though it might not depend entirely on the security of the smart contract

3. On and off-ramps

a. DEXs: Current DEX technology does not facilitate purchase of digital assets with fiat currency. While the advancement in stablecoin technology has made it easier, the lack of fiat on ramp and off-ramp makes it a hassle

b. CEXs: Convenient fiat on and off-ramp

DEXs provide an interesting alternative to the usual CEXs that still dominate traditional markets and cryptocurrencies. Touted as the exchanges of the future, DEXs are developing new infrastructure models for traders and investors. From improving scaling mechanisms to building trust with legacy financial institutions, these developments are necessary to ensure future adoption.