A decentralized exchange (DEX) is a peer-to-peer marketplace where users can trade cryptocurrencies in a non-custodial manner without the need for an intermediary to facilitate the transfer and custody of funds. DEXs substitute intermediaries—traditionally, banks, brokers, payment processors, or other institutions—with blockchain-based smart contracts that facilitate the exchange of assets.
Compared to traditional financial transactions, which are opaque and run through intermediaries who offer extremely limited insight into their actions, DEXs offer complete transparency into the movement of funds and the mechanisms facilitating exchange. In addition, as user funds don’t pass through a third party’s cryptocurrency wallet during trading, DEXs reduce counterparty risk and can decrease systemic centralization risks in the cryptocurrency ecosystem.
DEXs are a cornerstone of decentralized finance (Defi) and serve as a key “money LEGO” upon which more sophisticated financial products can be built as a result of permissionless composability.