Topic · Money, companies and rules
What is a DEX (decentralized exchange)?
- Quick fact 1
Decentralized exchanges let users swap tokens through smart contracts without a central custodian.
Source: ethereum.org: What is DeFi?
- Quick fact 2
Uniswap v2 uses liquidity pools and a constant product formula to price swaps.
Source: Uniswap v2 docs: How Uniswap works (liquidity pools)
- Quick fact 3
Swaps can execute at a worse rate than quoted; users set a slippage tolerance.
Source: Uniswap docs: Understanding swaps (slippage and price impact)
The short lesson
A centralized exchange is a company. You send it your coins, it holds them and matches your trades. A decentralized exchange (DEX) is software on a blockchain. You connect your own wallet and swap directly with a smart contract.
How most DEXs work
Instead of an order book, many DEXs use liquidity pools: smart contracts holding two tokens. A formula sets the rate. When you swap, you add one token to the pool and take the other out.
Upsides
- You keep custody until the moment of the swap.
- No account sign-up at the protocol level.
Risks to understand
- Fake tokens. Anyone can list a token. Check the contract address. See honeypot scams.
- Slippage. The final rate can differ from the quote. See slippage.
- Approvals and fake sites. Phishing copies of DEX websites drain wallets.
- No help desk. A mistake is usually permanent.
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Related terms
Go deeper in Lesson 7: What an exchange is
More in Money, companies and rules
Common questions
Is a DEX safer than an exchange?
It removes company custody risk but adds smart contract, phishing and user-error risks.
Do DEXs check ID?
The smart contracts usually do not. Website operators may restrict access in some places.
Why did I get fewer tokens than quoted?
Slippage and fees. Prices can move between quote and confirmation.
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Reviewed and sources
Written and reviewed by Joshua Baskin, founder. Last reviewed . How we check facts · Report an error
Education only. Not investment, tax or legal advice. We do not pick coins.