Understanding what a DEX platform is through the lens of blockchain technology

Recently, DeFi has been developing at a rapid pace, with decentralized exchanges (DEX) becoming one of the most attractive sectors. However, many people still wonder what a DEX is and why it has such a significant impact on the crypto market.

Basic Differences Between DEX and CEX

To understand what a DEX is, first compare it with a centralized exchange (CEX):

Operates entirely on the blockchain: Every transaction on a DEX is recorded via smart contracts and must be validated by the blockchain network before completion. This differs from traditional CEXs, where data is stored solely in a centralized database without waiting for blockchain confirmation or paying gas fees.

No complex authentication required: Anyone with a decentralized wallet can access the DEX immediately to trade, without going through cumbersome registration and KYC verification.

Users hold control of their assets: Your tokens are stored directly in your own wallet and are not sent to the exchange, reducing risks related to errors or asset loss on the platform.

Why DEX Hasn’t “Exploded” Until Uniswap?

Initially, DEX platforms like Bancor and Kyber tried to copy the order book model from CEXs—applying market makers combined with order-based trading and aggregation. However, because all transactions require on-chain validation, they are limited by block times and gas fees, resulting in a user experience significantly worse than CEXs.

It wasn’t until the launch of Uniswap that the situation changed. Instead of using a complex order book, they adopted an automated market maker (AMM) mechanism—a major innovation that made DEXs a practical choice for many investors.

Uniswap and the AMM Mechanism: A Revolution in DEXs

On Uniswap, there are no pending order lists. Instead, users exchange tokens through AMM—a mathematical algorithm that determines the exchange rate based on the liquidity pool.

Core formula: X × Y = K

Where X and Y are the quantities of each token in the liquidity pool, and K is a constant that never changes. When a liquidity provider (LP) deposits 10 [ETH]( and 100 [USDT]( into the pool, and you swap 1 ETH for USDT, the ETH in the pool increases to 11, but according to the formula, the USDT must decrease to keep the product K constant. This decrease is the amount of USDT you receive.

Of course, in practice, slippage and transaction fees make it more complex. Uniswap adds a 0.3% fee for all LPs as a reward, and after Uniswap, many other DEXs like Sushiswap, Pancakeswap with similar mechanisms plus token incentives (liquidity mining) have emerged, continuously increasing the total value locked (TVL) on DEXs.

Current DEXs: Impressive Numbers and Outlook

Uniswap currently holds over $8 billion in locked value, with daily trading volume reaching hundreds of millions of USD. In 2021, DEX trading volume repeatedly surpassed Coinbase—the world’s leading centralized exchange—leading many industry experts to believe that DEXs could replace CEXs in the near future.

Future: Can DEX Completely Replace CEX?

DEX platforms have seen remarkable growth in users and market share thanks to their simple interface, attractive liquidity mining mechanisms, and low initial capital requirements to become an LP—supporting speculative demand from many investors.

However, AMM is still not perfect. Some limitations include: only supporting instant trades, higher on-chain gas fees compared to CEXs, and the non-censored model potentially facing legal challenges in the future.

Current forecasts suggest that DEXs and CEXs will coexist and complement each other for a long time, each serving different needs within the crypto market.

Disclaimer: Cryptocurrency trading involves significant risks and may lead to the loss of your invested capital. The guidance materials are not related to providing investment, tax, legal, financial, accounting, consulting, or any other services. The content is for informational purposes only and does not constitute financial advice. You should ensure you fully understand the associated risks before investing.