TLDR: A decentralized exchange, or DEX, is where crypto investors can gather ‘round a hypothetical table and trade crypto like Pokemon cards — without needing an intermediary to facilitate the trade.
Historically, the world of finance has been accessible only through regulated intermediaries, such as brokerages, banks and advisors. While anyone could theoretically invest their money or trade securities, they've always had to pay gatekeepers or meet minimum wealth requirements in order to participate.
Today, decentralized finance, or DeFi, has blown the lid right off of the traditional investing models. Anyone — no matter their geographic location, credit score, or net worth — can open a crypto wallet and start lending, trading or staking their coins, without a broker or advisor to guide them.
But how do crypto traders gain access to the thousands of cryptocurrencies out there? Just like traditional finance, or TradFi, crypto investors need an exchange of some kind to buy, sell and swap their currencies. But unlike traditional exchanges like the New York Stock Exchange (NYSE), Nasdaq, London Stock Exchange, Hong Kong Stock Exchange and others, crypto exchanges operate under a different set of rules.
There are two kinds of crypto exchanges: centralized exchanges (CEXs) and decentralized exchanges (DEXs). Ahead, we go over the differences between the two and explain how to access a DEX.
A decentralized exchange, or DEX, is a type of decentralized application (Dapp) that lets users swap cryptocurrencies for another, along with performing various advanced DeFi trades like staking, lending or pooling to earn yield.
The whole point of decentralized exchanges is to strip away the intermediaries and give the most control to individual users as possible. You’re not locked in to one exchange or another: you can always use more than one, and leave at any time.
Centralized exchanges are middleman companies that allow customers to buy crypto with government money, or "fiat" currency. Because CEXs provide a direct link from your bank or credit card network to facilitate the purchase of crypto, they are are usually licensed as money custodians and follow regulatory guidelines of the region or country in which they operate.
Of course, as we've seen with the collapse of FTX — once the third-largest crypto exchange in the world — CEXs are not 100% trustworthy just because they can connect with your bank. For one thing, the world's largest CEXs are licensed to operate in several different countries, so the procedures and legal requirements are largely inconsistent. Secondly, regulators in every country are still deciding how CEXs should be classified. Cryptocurrency isn't exactly like a security, such as a stock or bond, but it also differs from regular cash and therefore exchanges that process crypto transactions aren't exactly like banks.
Decentralized exchanges, on the other hand, provide a trustless, permissionless and middleman-free way to swap crypto. All you must do is connect your crypto wallet to a popular DEX and start swapping, staking and lending. With DEXs, there’s no middlemen managing the transactions you want to do. Rather, the DEX uses code, algorithims and smart contracts to fulfill trades according to the parameters you set. And because blockchain logs every transaction, there is a record linked to your crypto wallet that shows your your history, similar to a bank statement.
When it comes to transactions, the possibilities are similar to those that a day trader might execute — just without the oversight of a broker: You can buy crypto, swap one crypto coin for another, sell off part of your crypto or earn interest on lending out your crypto to others. Popular examples of a DEXs are SushiSwap or DeFiSwap.
To access a DEX, you need a crypto wallet like Metamask, and Trust Wallet — two popular options. When you set up your wallet, you’ll create a recovery phrase. It’s the key to your wallet. With self-custody wallets, it's no key, no wallet access. You may see the recovery phrase also written as “seed phrase” but regardless of what you call it, it’s immensely important.
You’ll be connecting your wallet to different DEXes, so it’s important to connect/disconnect as you move from place to place. Although crypto wallets have security, there are plenty of sophisticated hackers that live to drain people's money from their wallets. Stay safe out there and do what you can to protect yourself from crypto hacking attacks.
If you’re excited to navigate this crypto landscape, here are popular DEXs to start with — plus what they are known for in the space.
Serise Lange is a contributor to Nav.it, the money management app helping all users build a future of wealth.
This article and all the information in it does not constitute financial advice. If you don’t want to invest money or time in Web3, you don’t have to. As always: Do your own research.