In our continuing series of In Case You Missed It reruns of previous articles, on this Throwback Thursday, we return to March of 2019 for a piece by Tahigichigi on understanding DEXs in under 5 mins.

Welcome to Intro to Crypto; my 20-part series explaining blockchain and crypto in simple, granny-friendly English.

Centralised Exchanges​

If  you want to swap your British pounds for dollars, euros or yuan you can  do that on exchanges like the NASDAQ. If you want to swap your bitcoin  for bitcoin cash, ether or XRP, you go to an exchange like Coinbase.

You  send your bitcoins to Coinbase and enter exactly how many ether you  want for your Bitcoins. Coinbase checks its system for someone doing the  opposite trade and pockets a small fee–0.5%-1%–for doing so.

This is how "centralised exchanges" work. Centralised exchanges like Coinbase are great because they do the following;

  • Let people trade cryptocurrencies 24/7, 365 from many countries.
  • Let you set up your account and start trading almost immediately.
  • Make money that's often used to improve features.
But. Centralised exchanges have a few drawbacks.
No keys

When  you send crypto to an exchange's wallet, they hold the private key.  This gives them complete control of your funds, just like a bank. Since  the spirit crypto is about taking control of your own money, this  doesn't sit well with many exchange users.Honeypot

Because the keys aren't in your control, you can't protect against thieves. Keys are usually stored on a computer (or 'server')  that becomes a target for hackers. Over the years, millions of bitcoins  have been lost to hacks, and because you can't create new ones, once  they're gone, they're gone for good.Government banning

Governments  like China, Korea and Russia have banned exchanges before, forcing them  to shut down or move elsewhere. Binance, one of the world's biggest  exchanges out of China saw the ban coming and moved to Malta where they  were welcomed with open arms. Others weren't so lucky."Down for maintenance"

Matching  buyers and sellers happens on servers owned by the exchange. When  exchanges update their software, they can go down for a long time. Worse  still, they can tell users they're "down for maintenance" when they've  been hacked and want to buy time, or they're about to disappear with  everyone's money (or 'exit scam').

QuadrigaCX  is a Canadian crypto exchange who's CEO died while travelling in India.  Because he was the only one with the wallet keys, $100m in crypto has  been locked inside the exchange ever since, with no way of returning it  to its rightful owners.

Thankfully, there's an answer to some of these problems.

Enter, Decentralised Exchanges

Decentralised  Exchanges (or DEXs) combine the best of both worlds. Like centralised  exchanges, they run 24/7, 365 for users all over the world. Unlike centralised exchanges, they tend to run on the blockchain, meaning users  stay in control of their funds and can't be hacked.

Clever Little Smart Contracts

Most DEXs today run on Smart Contracts.  Since Smart Contracts are just cryptocurrency wallets with a set of  rules built into them, they can't be hacked. Moreover, the rules say you  can only withdraw your crypto to the wallet you sent it from.


DEXs  can't be banned like centralised exchanges. This is because Smart  Contracts are run by computers all over the world, meaning there's no  headquarters to visit and no team to arrest.

While the website for  the DEX might go down, the Smart Contract itself never goes down. And  because all Smart Contracts live on the blockchain, you can check the  code yourself to make sure it's legit.


Last  but not least, many DEX users can stay completely anonymous. This means  no signing up, logging in or identity checks, which make for a better  experience. DEXs can also take a smaller fee than centralised exchanges  because of fewer overheads.

The Downside of DEXs

That's not to say DEXs are without their faults, including the following;

  • DEXs  are relatively new so there's less people buying and selling, making it  hard to quickly match the order you want. This means they lack 'liquidity'.
  • Many  DEXs are slower because your offer is verified, mined and broadcast all  on the blockchain (as opposed to matched against a list of orders on a  centralised exchange). This is kind of trading is called 'on chain'.
  • Because  matching and trading happens on chain, it can be more expensive. You  may pay a small transaction fee to the miners every time you make a  trade.
  • Some DEXs have little or no customer services because there's no company necessarily behind it.

Leaders of the New School

Early DEXs like EtherDelta and 0x were created after hacks of big exchanges like Mt. Gox where hackers stole 650,000 BTC. These DEXs have been running for years  but because of their limitations, new DEXs are appearing.

Waves is a DEX that runs on its own blockchain and connects to others so that users can trade tokens across multiple blockchains. Switcheo is another that lets you trade between tokens on the Ethereum and NEO blockchains.

More recently, centralised exchange giant Binance decided to launch its own DEX, which it hopes will have the liquidity  and speed of traditional exchanges with the security and self-custody of  DEXs. Whatever happens, it looks like DEXs are only getting more and  more popular.

More quick explainers from the world of blockchain…

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