Introduction: A Decentralized Exchange (DEX) allows users to trade between crypto assets without the need for a custodian or intermediary. This system is governed by smart contracts that manage the entire process, from informing conversion rates to executing trades.
How DEXs Work: The process is simple:
- Users authorize the sending of their coins.
- Smart contracts automatically handle the exchange, ensuring users receive the desired coin.
Models of DEXs: Several models of DEXs exist, with many utilizing a liquidity pool model. Here’s how it works:
- Liquidity Pools: Users deposit their coins into these programmed digital contracts.
- Staking Rewards: In return for providing liquidity, users receive rewards or staking income.
DeFi and Automated Arbitrage: Decentralized financial applications (DeFi) enable automated arbitrage, allowing users to take advantage of differences in asset quotations or loan rates. This automated trading is one of the key features that makes DeFi platforms appealing.
Benefits of DEXs:
- Security: No need for a central authority, reducing the risk of hacks.
- Transparency: All transactions are recorded on the blockchain, ensuring transparency.
- Control: Users retain control of their assets throughout the trading process.