Getting to Know What is DEX in Crypto, How it Works, Up to its Types

Liputan6.com, Jakarta In the crypto industry, there are two types of exchanges encountered by investors and traders, namely centralized exchange (CEX) and Decentralized Exchange (DEX).

CEX is one of the most popular exchanges that investors generally encounter or use, in contrast to DEX which many investors may not know about. So, what is DEX?

According to Cointelegraph, Decentralized exchange (DEX) is a peer to peer exchange that connects buyers and sellers of crypto assets. Unlike CEX, DEX is non-custodial, which means that users remain in control of their private keys when transacting through the DEX platform.

In the absence of a central authority, DEXs use smart contracts that execute themselves under defined conditions and record every transaction to the blockchain. Transactions without a central authority with a high level of security can represent an increasingly fast segment of the crypto asset market.

How DEXs Work

Since the decentralized exchange is built on top of a blockchain network that supports smart contracts and where users store their funds, every trade incurs a transaction fee along with trading fees. In essence, traders interact with smart contracts on the blockchain to use the DEX.

DEX Types

There are three main types of decentralized exchanges namely Automated market builders, order book DEXs and DEX aggregators. All of them allow users to trade directly with each other through their smart contracts.

The first decentralized exchanges used the same type of order book, similar to centralized exchanges.

Automated Market Makers (AMM) or Automated Market Makers

Automated market maker systems (AMM) that rely on smart contracts were created to solve the problem of liquidity. The creation of this exchange stems in part from inspiration stemming from Ethereum co-founder Vitalik Buterin’s paper on decentralized exchanges, which describes how to execute trades on the blockchain using token holding contracts.