What is a DEX
A decentralized exchange is nothing more than a smart contract deployed on an EVM chain (like Ethereum, Polygon or Tron Network). Users interact with a website (frontend of the decentralized exchange) using a Web3 wallet that lives inside their internet browser.
Today DEXs are taking the world by storm, and why wouldn’t they? On February 21, 2025 one the largest centralized crypto exchanges in the world suffered the biggest financial loss in human history when North Korean hackers stole 1.4 billion dollars worth of cryptocurrency. These things simply don’t happen on a DEX. Why?
Owning your private keys
When you deposit finds on a centralised exchange, you literally send your coins and tokens to an external address. This means your digital asset ownership is transferred to the exchange. “Not your keys, not your coins”, remember?
When we use a DEX, the funds always remain in our Web3 wallet (where you own your keys at all times). When we trade on a DEX, we only interact with a smart contract and sign transactions to execute our trades. The blockchain processes our transactions in real time and presto - your trade is completed!
Today’s decentralized exchanges are only limited by the speed and throughput of modern EVM chains. Luckily Solana and Monad are changing the game by cranking the speed up to 11. This allows people from all over the world to participate in a never before seen financial system. As long as you have a Web3 wallet (that you can install for free) and an internet connection, you’re welcome to participate!
The flaws of centralised exchanges
CEXs like Binance, Coinbase, Bybit and (formerly) FTX work a bit like traditional banks. You deposit your digital assets, and they show you numbers on a screen. Behind the scenes, however, they control your assets. After all, when you deposit your funds, you have sent your coins to an external address that you no longer control.
So what are the risks?
Your funds can be frozen or restricted. This has happened many times in the past. Especially during “peak times” when price volatility is at its highest. Even CEXs with a previously impeccable reputation (such as Trade Ogre) have done this.
A CEX is always vulnerable to hacks and mismanagement. Again even the biggest exchanges are not immune to external attacks. No matter how many “security protocols” and OPSEC we throw at this problem, human nature cannot be changed. Mismanagement (like FTX) or hacks will keep occurring time and time again.
A CEX requires your trust. As we deposit our funds on a CEX, we must by default trust the exchange with our capital. History has shown us that this is not only foolish, but incredibly irresponsible. After all, owning your private key means taking 100% responsibility over your digital assets.
Human Nature vs Code
A DEX removes the middleman. Instead of trusting a company to hold your funds and execute trades, you interact with smart contracts (self-executing programs on the blockchain) that facilitate peer-to-peer trading in real time. All from the comfort of your own Web3 wallet that lives inside your internet browser. The private keys are yours at all times!
Instant access
With a DEX, you don’t need to open a physical account. Your wallet IS your account. You simply connect with a Web3 wallet of your choice (MetaMask, Rabby, Trust Wallet, Phantom or even a hardware wallet) and start trading right there and then. Since your funds stay in your wallet at all times you can safely relegate the “deposit” option to the pages of the history books.
Liquidity pools vs Order Book
In the past buyers and sellers met each other in crowded bazaars and town squares. They displayed the goods, negotiated the price and shook hands as successful exchanges took place. Traditional exchanges work in a similar way. They use so-called “order books” to match buyers and sellers. If there’s no one to buy at your price, you wait until the “market maker” shows up and indicates the lowest price for a coin or token.
Decentralised exchanges are just code on the blockchain. There’s no luxury of “market makers” and “order books”. Things are much more simple! Any DEX uses something called “liquidity pools” - big pools of tokens supplied by users, ensuring there’s always liquidity available for trades. It may sound a bit counterintuitive, but below is a small example of how it would work.
Think of it like this: Imagine 2 giant holes in the ground filled to the brim with apples and oranges. For the sake of simplicity, let’s imagine we can trade 1 apple for 1 orange. You can drop an apple into one hole and take out an orange out from another one. This can be done by millions of people every single day. That’s in essence how a DEX works.
Every liquidity pool must keep a constant 50:50 ratio of apples to oranges. In the summer months as more oranges are swapped for apples, the “oranges pool” becomes larger, while the “apple pool” becomes smaller. The prices for oranges drop, while the prices for apples rise. Pretty easy and nicely automated. The “market making” happens automatically. This is why DEXs are also often called Automatic Market Makers (AMM’s).
Code is Law
DEXs operate through smart contracts that execute trades, adjust prices, and distribute fees automatically. At every step of the way there’s not a single human involved. And just like that we eliminate the risk of mismanagement by eliminating human involvement. Once the code of a DEX is deployed on-chain, it becomes transparent and can be audited by anyone in the world. This makes a DEX infinitely more anti-fragile than a CEX that operates with its own proprietary code.
Fruity Gains
Now you understand the basics, let’s take a look at the liquidity pools. If you have some apples or oranges that you don’t need today, why not let these delicious treats work for you?
When you deposit your own tokens inside a liquidity pool (for example ETH/LINK pool), YOU become the market maker. Your tokens provide the liquidity for traders and every single transaction that goes through your liquidity pool will earn you a small trading fee. This is also baked into the code and it incentivises you to bring your apples and oranges to this amazing decentralized marketplace.
Some people automate their income strategies by providing liquidity for years. Others like to “yield farm” in more risky pools by earning incentive tokens for their market making activities. Whatever the strategy may be, the code makes it all possible.
Security and Transparency by Default
Because DEXs run on EVM blockchains like Ethereum, Fantom or Polygon, all transactions are transparent and verifiable. There are no hidden fees, no “penalties” and no transactions that happen behind the scenes. Every step on a DEX can be checked and verified by anyone in the world using a simple blockchain explorer. Again, we take that pesky human nature out of the equation.
Using a DEX
By now you understand the benefits of decentralized exchanges and you wonder “why the hell didn’t I participate in this before?!” As good as DEXs are, there’s still a massive barrier to entry - education. Let’s face it, using a DEX is not as easy as opening a Coinbase or Binance account. Yet, more and more people bitten by the decentralization bug are doing it every day. Here’s what you need;
Research and download your Web3 wallet depending on the tokens you wish to swap (and the network you wish to work on) your wallet will need to accommodate all of this. Today Rabby, Phantom and Trust Wallet are considered the best multicoin wallets for decentralized exchanges. Install your wallet and back up your recovery phrase on at least 2 pieces of paper.
Fund your wallet. Here’s where we actually NEED the centralised exchanges, as they are often the guardians of “fiat currency” on-ramps. Use them to buy the gas token that your wallet needs (for Ethereum network you will need $ETH, for Solana you will need $SOL, …) and send these tokens to your wallet using a “test transaction”. Send a small amount to the wallet before you send the rest. Remember: crypto transactions are irreversible - you can’t allow yourself to make mistakes. This is why test transactions are so important. Swallow your pride, bite the bullet and pay the “withdrawal fee” to your CEX. It’s better to be safe than sorry.
Choose your DEX. Head down to coingecko.com and look in the section “decentralized exchanges”. Scammers love to use fake links to lure you into “wallet drainers” that look like real DEXs. This is why you must bookmark ALL official links of any DEX you use.
Start trading. Now all you need to do is connect your wallet to the exchange and start trading the tokens you want. Anyone can deploy a token on the blockchain. This can be a worthless token named after a legitimate asset. The safest way to look for your tokens on a DEX is by finding the token in coingecko.com and copying the “token contract address”. When you paste this address into the DEX search bar, you will always find the correct token! Ignore this rule at your own risk.
Learn, experiment and explore. Now that you made your first swap, it’s time to head out into the real world and learn all the ins and outs of decentralized exchanges. After all, you need to fully understand how all of this digital wizardry works. Ignoring this will most certainly cost you time and money. Mastering a DEX will ensure you see early opportunities and automated income.
Conclusion
Decentralized exchanges have opened the doors to true financial inclusion and unchained access to financial services to everyone in the world. The importance of decentralized exchanges cannot be understated. Previously gatekept industries have been disrupted overnight and long standing monopolies are slowly adapting to this new reality.
Today the largest financial institutions are actively looking to integrate DEXs into their own portfolio of financial services - very soon providing liquidity and yield farming will become mainstream. Today these services (although fully open and decentralized) are not yet open to a wide audience due to lack of technical skills and experience. Today you have just dipped your toes into DEXs. You understand what powerful technology you have at your fingertips. Now it’s time to venture deeper into this industry and learn everything you can about what it has to offer.
