What is a DEX (decentralized exchange)?

How do you swap one token for another without first handing your crypto to a company? You connect your wallet to a DEX, choose the pair you want and approve the transaction. Smart contracts, i.e. programs that run on the blockchain, carry out the swap according to their rules.

Many DEXs use liquidity pools: reserves of crypto deposited by other users. Think of an automated currency exchange booth with two reserves. You put in one currency and get the other, while an algorithm calculates the exchange rate. This mechanism is called an automated market maker (AMM). Not all DEXs work this way, though; some use order books, where buy and sell offers are matched.

For example, you can swap ETH for a stablecoin on the same network. Before you sign, the trading interface shows the estimated amount you’ll receive and the fees. The swap fee and the network fee are separate costs.

Why it matters

The key difference from a centralized exchange is self-custody of your funds: you usually don’t need to keep a balance in a company’s account to make the swap. This reduces your reliance on a custodian, but shifts more responsibility onto you.

DEXs also give access to tokens that may not be available on centralized exchanges. We value this open access, but we don’t confuse it with quality control: a token being on a DEX is not a security certification.

What to watch out for

Low liquidity can lead to slippage, i.e. a difference between the expected price and the execution price. In addition, a large amount in a small pool can on its own move the price noticeably.

There are also risks from bugs in the contracts, fake tokens and fake websites. Connecting your wallet isn’t the same as a token spending approval: a malicious approval can allow your tokens to be drained. Check the token’s contract address, the network and what your wallet is asking you to sign. “Decentralized” doesn’t mean anonymous or risk-free.