EXCHANGES & TRADING

What is a Decentralised Exchange?

What is a Decentralised Exchanges (DEX)

A Decentralised Exchange (DEX) is a blockchain-based platform that enables peer-to-peer (P2P) trading of cryptocurrencies without intermediaries. Instead of relying on a central company to hold funds and execute trades, DEXs use smart contracts; self-executing pieces of code that automatically handle trades directly on the blockchain.

When you use a DEX, you connect your personal wallet (such as MetaMask, Ledger, or Trust Wallet) and trade directly from it. This means you retain control of your private keys and your funds throughout the entire process. The trade occurs between two wallets, with the DEX protocol simply facilitating the swap or order matching on-chain.

DEXs can operate using different models:

Automated Market Makers (AMMs): These use liquidity pools instead of order books. Users provide pairs of tokens (for example, ETH and USDC) into a pool, and an algorithm determines prices based on supply and demand. Examples include Uniswap & PancakeSwap..
Order Book DEXs: Similar to traditional exchanges but executed on-chain. They maintain lists of buy and sell orders. Examples include dYdX and Serum.
Aggregators: Platforms that route trades through multiple DEXs to find the best price or lowest fees, such as 1inch and Matcha.

Common Examples

Uniswap (Ethereum)
PancakeSwap (BNB Chain)
Raydium (Solana)

Why traders choose a Decentralised Exchange

DEX’s are used by investors who prioritise security, privacy, and autonomy. Because trades occur directly between wallets, there’s no need to trust a third party with custody of your assets. You don’t have to create an account, submit identification, or rely on centralised withdrawal systems. True self-custody & self management can be reached through using decentralised methods.

However, DEXs demand a deeper understanding of blockchain mechanics; gas fees, slippage, smart contract risk, and wallet safety. They are less beginner-friendly but far more aligned with the true decentralised ethos of crypto.

How to use a Decentralised Exchange

These are the five steps for setting up and using your Decentralised exchange account:

Install or open a non-custodial wallet (MetaMask, Ledge, Trustwallet, etc). Find out which non-custodial wallet is right for you here
Connect your wallet to the DEX site.
Select token pair, set slippage tolerance and gas limit.
Sign the transaction from your wallet, pay on-chain gas fees.
Transaction is mined, trade settles on-chain directly between addresses or via liquidity pools.
Security step: Disconnect your wallet from the DEX site when finished.

DEX trades are trust-less and atomic, but they require managing keys, gas fees, and on-chain risks such as slippage.

Pro's and Con's of a Decentralised Exchange

Here are the Pro’s & Con’s of using a Decentralised Exchange:

Pro’s of DEX

Con’s of DEX

Self custody: You keep control of private keys and funds until you sign a transaction. This removes single-custodian risk.

On-chain risks: Smart contract bugs, rug-pulls from unaudited tokens, liquidity impermanent loss, and user error.

Permission-less listings: Any compatible token can be traded without an approval gate, enabling early access to new projects.

MEV and front-running public meme-pools let bots reorder and sandwich transactions for profit, which can increase effective costs for retail swaps. Techniques exist to mitigate this, but it is a real on-chain risk.

Censorship resistance and composability: DeFi primitives can be combined programmatically across protocols.

Gas costs and UX: For example; on Ethereum mainnet gas can make small trades uneconomical, bridging and cross-chain trades add complexity.

Risks of a Decentralised Exchange

Distributed Code and Self-Custody
DEXs eliminate custodial risk by letting users retain control of their private keys. Funds only move when the user signs a transaction. This removes corporate failure risk but introduces smart contract risk; vulnerabilities in the code that could be exploited if increased due diligence from the holder isn’t active.

Operational Attacks
DEX vulnerabilities typically arise from smart contract bugs, oracle manipulation, or malicious token contracts interacting with the exchange. Rug-pulls in unaudited pools or compromised front-end websites can also endanger funds.

Regulatory Interventions
DEX’s are harder to regulate since they run as open-source smart contracts. However, front-end interfaces and aggregators (like Uniswap’s website) can still be restricted under legal pressure, and cross-chain bridges are increasingly scrutinised. In simple terms, the weigh-up of using a peer to peer system to eliminate the middle man also eliminates the security guard that ensures safe transaction success.

Fees, Liquidity, Slippage, and Speed

DEXs charge small swap fees (typically 0.05%–0.3%) that are distributed to liquidity providers, plus network gas fees that vary by blockchain. This minimal fee structure is superior to a CEX’s fee structure as there’s no middle man commission (Exchanges) taking place. However it’s important to express that whilst transaction fees are extremely minimal, less financially backed projects, such as majority of the Memecoins & DeFi token market require a greater slippage tolerance to fund the transaction. This increased slippage fee takes away from the total purchase quantity, and in its own way can be viewed as a not so different financial trade-off.

While trades are transparent and trustless, DEXs can experience:

Higher slippage on low-liquidity pairs.
Slower trade execution, since every transaction must confirm on-chain.
Network congestion, which can increase gas costs dramatically.

With these factors in mind, the overall consensus for semi-experienced investors looking for self-custodial & decentralised options for trading Cryptocurrency remains with using a decentralised exchange.

Regulation and Compliance

Unlike CEX’s, DEX’s don’t require KYC or user registration. However, global regulators are increasingly targeting DeFi protocols, front-end operators, and token issuers to enforce compliance. The SEC and similar bodies have begun investigating whether some DEX activities qualify as securities trading. But as at the current time of writing this (October 2025), no official requirements for KYC or user registration is required across the vast majority of Decentralised exchanges.

This evolving environment means DEXs remain accessible but not immune to legal pressure, especially as regulation tries to catch up with DeFi’s rapid growth.

Safety Tips for Using a Decentralised Exchange

Always trade using a cold (hardware) wallet or trusted warm (software) wallet.
Verify token contract addresses on official project channels.
Set realistic slippage tolerance and review gas estimates before confirming.
Start with small test swaps before making large transactions.
Always disconnect your wallet from the decentralised exchange directly after use.

Final Recommendations for using Decentralised Exchanges

Keep private keys secure and offline when not in use.
Trade only on reputable, audited DEX’s with sufficient liquidity.
Learn about gas, slippage, and smart contract risks before large trades.
Review your wallet permissions regularly to revoke unnecessary approvals.

Use a Decentralised Exchange when:

You want full control of your funds.
You’re trading new or early-stage tokens not yet listed on major CEXs.
You want privacy and permission-less access.
You’re participating in DeFi strategies like yield farming, staking, or liquidity provision.

Now that you know all about Centralised Exchanges, our next lesson is all about “What is a Centralised Exchange”.