A peer-to-peer exchange allowing users to trade cryptocurrency without the need for an intermediary.
Traditionally, trading cryptocurrency requires the use of a centralized exchange. CEXs match the orders of someone who wants to buy crypto with someone who wants to sell, and vice versa. They can be thought of as similar to securities exchanges.
But there are several perceived disadvantages associated with traditional, centralized exchanges.
These platforms are owned privately. This means that there is a third party with its own motives and priorities — sitting in the middle of every transaction made.
As a result, these private companies have oversight of those transactions, and collect and hold details on all its customers. This is a direct challenge to one of the cornerstones of cryptocurrency: that there should be the opportunity for anonymity if desired by a user.
Just as importantly, transactions conducted on centralized exchanges are custodial — meaning the platform holds the asset that is being exchanged.
Decentralized exchanges tackle both of these issues, offering theoretically complete anonymity and, crucially, non-custodial transactions. This means the actual asset being exchanged never passes through the hands of an intermediary.
DEXs are seen by many as a vital part of the next wave of development in crypto. However, truly decentralized offerings (for example Radar Relay, which is built on the 0x protocol) are still very much in their infancy, and trading volumes on these platforms tend to be low.
Additionally, DEXs are likely to face further challenges from regulators, who have signaled that they do not agree with the view that decentralized exchanges should not be subject to the same oversight as centralized rivals because they do not actually hold assets.