DEX
Decentralized Exchange
A DEX (decentralized exchange) is a platform for trading crypto assets directly between users via blockchain smart contracts, without an intermediary that holds funds.
A DEX is a decentralized exchange where token swaps are executed by smart contracts on a blockchain. Users connect their own wallets, and assets are not transferred to an operator for custody, as happens on a centralized exchange (CEX).
## How it works
Most DEXs are built on an automated market maker (AMM) model: the price is set by a formula based on the ratio of tokens in a liquidity pool. Liquidity is provided by users themselves, who deposit token pairs into the pool and earn a share of the fees. Order books are used less often but still exist.
## Where it is used and what it affects
DEXs are widely used in DeFi, for trading tokens not listed on major CEXs, and for trading memecoins. For projects, they are an important source of liquidity. For traders, the key factors are slippage, network fees (gas), and pool depth.
## Common mistakes
The main risks include counterfeit token addresses with similar names, pools with low liquidity and high slippage, granting unlimited token approvals to a questionable contract, and phishing sites that clone the interface. Decentralization does not remove the responsibility to verify a contract before trading.
## Regulatory considerations
Because a DEX does not hold users' funds, KYC and AML requirements apply to it in ambiguous ways, depending on the jurisdiction and the specific operating model. For front-end operators and developers, the rules may differ, so the question should be reviewed with a lawyer.
FAQ
How does a DEX differ from a CEX?
On a CEX, the operator holds users' funds and runs the order book. On a DEX, users trade from their own wallets, and trades are executed by smart contracts without an intermediary custodian.
Do you need to pass KYC on a DEX?
Protocols that operate without registration usually do not require KYC. However, requirements for front-end operators and individual services depend on the jurisdiction and may differ.
Why do large losses happen on DEXs?
Common causes include low pool liquidity, high slippage, and fraudulent tokens. Before trading, it is worth checking the contract address and pool size.