What Is a DEX?

Last updated August 30, 2021

A DEX is a decentralized exchange, one of the most popular applications of DeFi. Just as with everything else in decentralized finance, DEXs allow users to sidestep centralized parties in the middle. While centralized exchanges like Coinbase and Binance have played a huge role in onboarding more people to cryptocurrency, they have also inserted an unnecessary middleman back into a trustless transaction.

DEXs allow users to trade trustlessly while keeping hold of their own private keys with no centralized party holding their funds. Early DEXs like IDEX and Etherdelta suffered from a poor user experience and low liquidity as they lacked the marketing resources and powerful servers of centralized exchanges. They also relied on an order book, making for a significant lag in matching orders due to the low liquidity, which also made them easy to manipulate.

With the rapid development of DeFi, DEXs began to iterate quickly and replace the order book model with an intermediary token. Exchanges like Bancor and Uniswap began to emerge using automated market makers to make trading between two tokens with lower liquidity easier. This has certainly fueled the growth, popularity, and usage of DEXs, however, this model is not without its problems.