Innovation aside, cryptocurrency trading is a big part of this emerging industry. There are millions, if not tens of millions, of traders employing different strategies to have an edge in the markets. Crypto trading platforms are critical in boosting liquidity and accelerating adoption.

The first exchanges were centralized. Examples include Binance, Coinbase, and others.

However, with smart contracts and blockchains’ transparent, immutable nature, innovators released decentralized exchanges for trading multiple, platform-specific tokens without intermediaries.

A decentralized exchange, commonly known as a DEX, is a dApp or a platform where various tokens can be swapped in a peer-to-peer environment guided by smart contracts. Trading is possible because, as mentioned earlier, smart contracts, being automated code, execute transparently in a ledger. Depending on the code, tokens can be swapped smoothly without hitches, just like it would have happened in centralized options.

The first iterations of DEXes, including Bancor, adopted the order-book model before shifting to the automated market maker model (AMM) following the success of Uniswap. Despite the desire in the trading community, initially, the order-book model faced liquidity challenges which were resolved by the AMM model implemented by Uniswap in late 2018.

Almost all DEXes use the AMM model or its variation in account-based blockchains like Ethereum, the BNB Chain, Harmony One, and others. AMMs significantly boosted DEXes’ liquidity by incentivizing liquidity provision, allowing providers to earn passive income. 

However, not all DEXes use the AMM mode. As mentioned, DEXes deployed on account-based models use the AMM system. Meanwhile, in blockchains like Cardano and Ergo, whose developers added smart contracts on the UTxO model employed by Bitcoin, its DEXes use the order-book model. For liquidity, they have ordinary pools but use an off-chain order-matching engine.

DEXes offer several advantages over centralized exchanges. Nonetheless, they are a work in progress and being refined for more clients on-boarding. If you want to learn more about DEXes and crypto, tune in to our podcasts.

Dalmas Ngetich

Dalmas is a very active cryptocurrency content creator and highly regarded technical analyst. He’s passionate about blockchain technology and the futuristic potential of cryptocurrencies.