What Is a Decentralized Exchange?

A decentralized exchange (DEX) is an exchange that's designed to allow cryptocurrency traders to transact directly without intermediaries. In short, it is a peer-to-peer platform where users transact in a non-custodial manner.

#What Is a Decentralized Exchange?

Lately, decentralized exchanges (DEXs) have become quite robust, with many crypto investors and developers using them as alternatives to customary centralized crypto exchange platforms. So, if you are planning to venture into the crypto exchange business, you should consider creating your own DEX.

But before you create a decentralized crypto exchange platform for your investment, you need to understand what it is and how it works. In this article, we will go over both.

#What is a DEX?

A decentralized exchange platform was designed to allow cryptocurrency traders to transact directly without intermediaries. In short, it is a peer-to-peer platform where users transact in a non-custodial manner. With the traditional centralized exchange platforms, users are required to use intermediaries to carry out transactions.

A DEX does not require you to deposit your crypto coins into an intermediary account to complete an exchange. Therefore, this type of platform does away with the traditional practice of using intermediaries like banks, payment processors, crypto brokers, and other financial institutions, which have long been accused of complicating crypto exchanges. DEX platforms use blockchain-based smart contracts to facilitate the smooth exchange of digital assets like cryptocurrency.

Buying crypto on a decentralized exchange platform is smooth and transparent because the funds do not go through an intermediary cryptocurrency wallet. Traditional exchange platforms are usually opaque and use third-party cryptocurrency wallets that offer a very limited understanding of their workings. This opaqueness increases counterparty risk and systematic centralization within the cryptocurrency ecosystem.

A DEX platform is a cornerstone of decentralized finance (DeFi) and serves as the main “money LEGO” upon which better financial products are created due to composability that does not require permission.

#How a Decentralized Exchange Platform Works

Please note that DEX platforms come in varied designs depending on the goals and intentions of their developers or owners. Each platform is designed to offer unique benefits and trade-offs using its unique features, decentralization, and scalability. The mechanisms of your DEX platform also depend on the type of Web3 development platform you use to develop your exchange marketplace. Thankfully, there are numerous reliable development platforms like OpenDAX that you can use to come up with a user-friendly platform.

Regardless of the design you choose for your DEX, there are certain functionalities and workings that it should deliver. For instance, it should offer a high degree of autonomy through blockchain technology and unchallengeable smart contracts. This allows users to fully control their funds by using their self-hosted crypto wallets during the exchange.

Users of DEX are only expected to pay two types of fees: network fees and trading fees. Also known as the “gas cost,” the network fee is the cost of the on-chain exchange, while liquidity providers collect the trading fee, underlying protocol, and token holders. The whole idea of having a decentralized exchange platform is to give users unrestricted access to an end-to-end on-chain platform without central points of disaster.

This is supposed to decentralize independence, allowing users to carry out transactions freely without having to rely on the accessibility and effectiveness of third parties. It offers users decentralized ownership across the community of devolved stakeholders; therefore, a devolved independent organization administers protocol administrative rights, which include a community of participants who make important protocol decisions.

Lastly, DEX platforms with a devolved governance system strengthen resistance against censorship and offer long-term resilience. Many crypto investors prefer DEXs because they allow them to exchange without going through third parties and their instant liquidity, seamless onboarding, and liberal access to trading and funds.