How Decentralized Exchanges Work (DEX)

Nowadays, as banks freeze accounts and centralized exchanges collapse one after another, people are increasingly wondering: Is it possible to trade crypto while keeping complete freedom and control over your money? The answer is decentralized exchanges. This is not just a trend, but a real revolution. DEX have changed the rules of the game in the market: over the past two years, their trading volume has grown fivefold, and by the end of 2024, the total turnover exceeded $1 trillion. These numbers show that DEXs are no longer a playground for tech enthusiasts but a serious alternative to traditional exchanges. Why this matters and how exactly decentralized exchanges work, we will explain simply and to the point.

Why DEX Are More Than Just Hype

Back in 2020, the share of DEX in the market did not exceed 2%, and most people had never even heard of them. But after the loud collapse of FTX in 2022, followed by the bankruptcies of several other centralized platforms holding billions of dollars of customers’ funds, trust in classic exchanges dropped sharply. In response, traders and investors began to switch en masse to DEX. According to DeFiLlama, by early 2025 the share of decentralized trading platforms had already surpassed 20% of the entire crypto market turnover.

DEX stopped being a hobby for DeFi fans and became the first line of defense for those who value privacy and security. On centralized exchanges, your account can be frozen by request of regulators or due to a system failure, while on DEX no one can stop your transactions or freeze your funds. This factor has become the main driver of growth. More and more people around the world are realizing: if you want to truly own your assets, you need to choose decentralization.

What a Decentralized Exchange Is

A decentralized exchange is a platform that allows users to trade tokens directly with each other without intermediaries. The entire operation of a DEX is built on smart contracts that automatically execute trades and guarantee transparency. Unlike centralized exchanges, DEX do not keep your funds on their accounts. The assets stay in your wallet until the moment of the trade. You connect a wallet like Metamask, select the tokens you want to exchange, confirm the transaction, and the smart contract executes the trade on the blockchain.

Today, there are already more than 400 decentralized exchanges operating on various blockchains: from Ethereum and BNB Chain to Arbitrum and Solana. Multichain DEX are also emerging, allowing users to swap tokens between different networks, making the process even more convenient. This evolution removes barriers between ecosystems and makes DEX a full-fledged competitor to centralized platforms.

How DEX Work in Practice

On traditional exchanges, trading happens through an order book: someone places a buy order, someone else a sell order, and the exchange matches them. On DEX there is no order book. Instead, they use the AMM model – an automated market maker. At its core are liquidity pools where users deposit pairs of tokens. For example, by adding $5 000 in ETH and $5 000 in USDC, you provide liquidity for trading. Other traders use your pool for swaps, and you earn a commission on each trade.

The smart contract automatically recalculates the price after every transaction to keep the pool balanced. Uniswap, for instance, uses the formula ‘x * y = k’, which ensures prices change dynamically depending on the token ratio. This allows trades to be executed instantly, without having to wait for a matching order. On major DEX, daily trading volumes already exceed $4-5 billion, and that is only counting Uniswap and PancakeSwap.

The Role of Liquidity Pools and Automated Market Makers

Liquidity pools power DEX and create the environment for token swaps. The more funds there are in a pool, the smaller the spread between buy and sell prices, making trades more favorable for everyone. That is why platforms actively incentivize users to add liquidity by offering commission rewards and token bonuses. In 2024, the average yield for liquidity providers on popular DEX ranged from 8% to 25% per year depending on the selected pair and trading activity.

Thanks to AMM, anyone can become a market maker: you do not need millions in capital or professional equipment. All it takes is a wallet and tokens. However, you need to be aware of the risks: if token prices change sharply, you may face impermanent loss, which reduces profits compared to simply holding the tokens. This risk is especially high in volatile markets, where token prices can swing by dozens of percent within a single day.

Challenges and Limitations of DEX Today

DEX are developing rapidly, but they have their weaknesses. One of the main problems is price slippage during large trades. For example, on popular pairs like ETH/USDC on Uniswap, transactions over $1 million can move the price by 0.5-1%. For low-liquidity tokens, slippage can reach 10% or more, making big trades unprofitable.

Another issue is the high transaction fees on popular networks. On Ethereum, fees during periods of heavy network load can exceed $50, and at peaks can even reach $200. This makes DEX impractical for small trades. Also, the interfaces can be confusing for beginners: a single mistake when setting up or choosing a token can cost you all your funds. Finally, DEX still do not offer convenient tools for leveraged trading, options, and other derivatives that professional traders use on centralized exchanges.

Development Prospects and Mass Adoption

The future of DEX is directly tied to technological progress. Layer two solutions like Arbitrum, Optimism, and zkSync make it possible to reduce fees by tens of times, making DEX transactions accessible to everyone. Already by 2025, around 35% of all Ethereum transactions happen through these networks, and according to Delphi Digital’s forecast, their share will grow to 70% by the end of 2026.

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