Definition
A decentralized exchange, or DEX, is a trading protocol that executes asset exchanges through blockchain-based contracts rather than relying entirely on an operator’s internal ledger. Many DEXs allow wallet-based trading without depositing a balance into a conventional exchange account. Designs differ: some components, interfaces, or administrative controls may still be centralized.
How It Works
A trader authorizes a transaction that exchanges specified assets under the protocol’s rules. In a liquidity-pool model, deposited reserves provide the assets for swaps, and the pricing mechanism adjusts the execution price as the trade changes the pool. Other designs use order books or route orders among different liquidity sources.
For example, swapping a token for a stablecoin requires the correct network, adequate liquidity, and any necessary token approval. The quoted output can change before execution. A minimum-output condition can cause the swap to revert rather than settle below the permitted amount, although a failed on-chain transaction may still consume network fees.
Key Considerations
Self-custody reduces dependence on an exchange holding balances, but does not make trading risk-free. Contract flaws, malicious token permissions, price impact, and transaction ordering can cause losses. A token appearing in a pool is not an endorsement. Verify the asset’s contract address and understand the permissions being signed.