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Understanding DEXs

Posted July 25, 2022 4:54 pm
2 min
By Yehia El Amine

A vital part of DeFi, and the cryptocurrency ecosystem are decentralized exchanges, better known on the internet as DEXs. They represent the lifeblood of the industry since they are a peer-to-peer (P2P) marketplace where transactions occur directly between crypto traders. 

However, it is essential to note that these financial transactions aren’t officiated by banks, brokers, payment processors, or third-party intermediaries. 

Some of the most popular DEXs leverage the Ethereum blockchain and fall under the general umbrella of decentralized finance (DeFi), allowing for the direct utilization of crypto wallets – be them hot or cold wallets. 

According to Coinbase, Q1 of 2021 reported $217 billion worth of transactions went through decentralized exchanges. As of April last year, there were more than two million DeFi traders, a ten-fold increase from May 2020.

In lieu of Web3 gaming, if users own a game’s asset in utility tokens, they can trade them them through a DEX such as Uniswap. They could even deposit them in a liquidity pool to potentially generate a return from the trading fees. Liquidity pools are core to DEXs, it’s where the exchanges happen. By participating in a pool you typically take a directional bet on the asset, so best be wary before committing.

Cryptocurrency exchanges play a pivotal role in buying and selling crypto assets and can be divided between centralized (CEX) and decentralized (DEX). However, most are not fully decentralized, nor do they preserve the anonymity preached in the creation of cryptocurrencies. 

DEXs offer less invasive alternatives for those seeking discretion and privacy. There is no identity verification trade, only needing a crypto wallet to connect to make a transaction – an example of these wallets is MetaMask. Instead of employing thousands of people to process crypto trades like a centralized exchange such as Coinbase, a DEX is run completely via code.

It is worth highlighting that not all DEXs offer marketplaces for Non-Fungible Tokens (NFTs); among the ones who do are Uniswap, Trader Joe, and several others. For example, players taking part in Web3 games running on the Avalanche blockchain will look to trade their gaming tokens on Trader Joe, and their NFTs on JoePegs

Keep in mind that every blockchain has its marketplaces and decentralized exchanges, which is why users must understand the game’s respective ecosystem and the blockchain they reside on prior to starting.

This was just a brief intro to decentralized exchanges. Remember to always do your own research first and keep an eye out for more educational articles coming soon.

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