A New Form of Cryptocurrency Trading: DEX is Changing the Decentralized World

Introduction: Why DEX is Gaining Attention

When cryptocurrencies were first born, what was needed for trading was a platform that connected buyers and sellers. However, in traditional centralized exchanges, users had to deposit their assets and have them managed.

With the evolution of technology, new options have emerged. This is the decentralized exchange (DEX). It has realized a system that eliminates intermediaries, allowing users to have complete control over their assets.

In this article, we will explain the mechanism of DEX, its advantages and disadvantages, and future developments in an easy-to-understand manner.

What is DEX: A New Form of Cryptocurrency Trading

Decentralized Exchanges (DEX) are platforms that allow direct trading of digital assets without intermediaries. The main feature is that everything is executed automatically by smart contracts.

In traditional centralized exchanges, users' asset management is entrusted to the exchange. In contrast, with DEX, users can access their assets directly from their wallets and trade with other traders on the blockchain. Since users hold their own asset private keys, no one can take their assets away.

Fundamental Differences with Centralized Exchanges (CEX)

CEX mechanism: Convenience in exchange for

In a centralized exchange, when you deposit cryptocurrency, the exchange manages it. The advantages include immediate transaction completion and ease of use for the users.

However, there is a pitfall here. Since assets are entrusted to others for management, there is a possibility of losing assets if the exchange is hacked or goes bankrupt. Additionally, users need to trust the exchange and are always at risk of that trust being betrayed.

DEX mechanism: freedom and responsibility

On the DEX, users connect their wallets directly to trade. All transactions are recorded on the blockchain and can be verified by anyone, making transparency extremely high.

Since exchanges do not hold assets, they are protected from system failures and fraudulent activities. However, this means that the responsibility for managing private keys and understanding gas fees increases for the users themselves.

DEX Trading Mechanisms: Three Main Models

On-chain Order Book Method

It is the most transparent method where all orders are recorded on the blockchain. Third parties cannot manipulate the orders.

However, there are drawbacks such as high network fees and slow processing.

Off-chain order book method

This is a method of managing part of the order outside of the blockchain. It balances transparency and efficiency, but there is a risk that the operator may manipulate the market.

Automated Market Maker (AMM): Current Mainstream

It is the most innovative and currently the most popular model in the DEX space. Prices are automatically calculated from an asset pool called a liquidity pool, eliminating the need to match buyers and sellers.

The formula “x × y = k” used by Uniswap is a prime example. Liquidity providers deposit assets into the pool and are able to earn fees.

Thanks to this method, trading can be done 24/7, greatly improving the convenience of DEX.

Popular DEX Projects

Uniswap: overwhelming popularity

It is the most used DEX on Ethereum. With an intuitive UI, ample liquidity, and multi-chain support, it has become the top choice for cryptocurrency users.

SushiSwap: An evolved version of Uniswap

Originally developed based on Uniswap, the project added governance tokens and liquidity mining rewards to build its own ecosystem.

PancakeSwap: A Representative of the BNB Chain

It is a DEX that operates on the BNB Smart Chain, and it is supported by many users due to its significantly lower fees compared to DEXs on Ethereum.

Benefits of Using DEX: Freedom and Transparency

• Complete Self-Custody: Trade directly from your own wallet, without entrusting asset management to anyone.

• Accessible from anywhere in the world: Anyone can use it as long as they have a wallet and an internet connection.

• Tokens not listed on exchanges can also be traded: Tokens from emerging projects that are not listed on centralized exchanges can be traded if there is sufficient liquidity.

• Complete Transparency: All transactions are recorded on the blockchain, making tampering and concealment impossible.

Challenges and Risks of DEX: The Reality We Must Face

Smart contract risks

DEX is built on complex smart contracts. If there are bugs in the code, they can be exploited by hackers. In the past, there have been cases where significant losses were incurred due to security vulnerabilities.

Issues due to lack of liquidity

In smaller DEXs, there may be a lack of liquidity, which can result in significant slippage (the difference between the expected price and the actual execution price) during transactions.

User Experience Challenges

For beginners, operating a DEX is complex. There is a lot to master, including wallet management, seed phrase storage, gas fee calculation, and understanding how blockchain works.

front-running

In a DEX, transactions are made public, allowing other users to pay higher fees to intercept your order and purchase at a better price.

network fee

When the blockchain is congested, gas fees can soar, leading to a significant increase in transaction costs.

Future of DEX: New Possibilities Are Expanding

Evolution of Layer 2

Scaling solutions such as rollups and sidechains are making faster and cheaper transactions possible. This will significantly improve the convenience of DEX.

Utilization of DAO (Decentralized Autonomous Organization)

The movement to fully automate and democratize the operation of DEX is underway. By holding governance tokens, users will be able to participate in the decision-making of the protocol.

Development of Cross-Chain Transactions

A technology for directly trading assets between different blockchains is under development. This will further enhance the flexibility and convenience of DEX.

Conclusion: Gain freedom in cryptocurrency trading with DEX

DEX is realizing the democratization of cryptocurrency trading. By eliminating intermediaries, it allows users to manage their assets directly and provides global access to financial services—that is the essence of DEX.

Certainly, there are still challenges. However, as the adoption of decentralized finance progresses, DEX will come to play a central role in the cryptocurrency ecosystem.

If you are interested in DEX, it is worth trying it out at least once. However, be sure to conduct thorough research beforehand, ensure the safe management of your private keys, and use it with an understanding of the potential risks.