Table of Contents
A decentralized exchange (DEX) is a peer-to-peer marketplace where users can trade tokens without relying on intermediaries like banks, brokers, payment processors, or other institutions.
DEXs are one of the pillars of the decentralized finance (DeFi) ecosystem and have steadily grown in popularity. In fact, the monthly DEX trading volume has consistently surpassed $300B in recent months.
How Do DEXs Work?
The three primary types of DEXs are Order Book DEXs, Automated Market Makers (AMMs), and DEX Aggregators.
Order Book DEX
Order book DEXs work pretty similar to centralized exchanges. They use an orderbook that records all the buy and sell orders. These DEXs come in two forms:
- On-Chain Order Book: All the trade data is recorded on-chain, making it fully decentralized.
- Off-Chain Order Book: A hybrid model where orders are processed off-chain, while final settlement is done on-chain. While this method is faster, it’s not fully decentralized.
AMMs (Automated Market Makers)
AMMs allow people to trade cryptocurrencies without needing a buyer or seller on the other side. Instead of using an order book, AMMs use “liquidity pools,” which are pools of crypto assets funded by liquidity providers. These pools allow traders to swap tokens instantly, with prices automatically adjusted based on supply and demand. In return, liquidity providers earn a share of the trading fees collected from swaps.
Depending on the type of AMM used, the liquidity pools use specific algorithms to maintain the supply and demand of all the tokens in its pool.
Let’s take an example.
- Imagine a liquidity pool containing $10 million in BNB and $10 million in USDC.
- Now, a trader swaps $500,000 USDC for BNB
- The pool now has more USDC and less BNB, causing the price of BNB to increase. The price increase will be dependent on the algorithm used by the liquidity pool.
Features of AMMs:
- Always Available: You can trade instantly, without waiting for a match.
- Open to All: Users can deposit tokens into a pool and earn rewards.
- Supports Any Token: New tokens can be traded easily without needing approval from an exchange. The only thing it needs is liquidity.
Most modern DEXs follow the AMM model.
DEX Aggregators
DEX aggregators scan multiple DEXs to find the best price, lowest fees, and most efficient trade execution. They help you find the best trades across all the DEXs they track. 1inch is a very popular DEX aggregator.
DEX Ecosystem on BNB Chain
The DEX ecosystem on BNB Chain includes key players like PancakeSwap and Thena.
PancakeSwap
Launched in September 2020, PancakeSwap accounts for nearly 90% of the total DEX TVL on BNB Chain, making it the leading decentralized exchange in the ecosystem. In addition to trading, it offers features like staking, yield farming, and more. The platform’s native token, CAKE, is used for rewards and governance.
PancakeSwap Stats
#1 Liquidity and 24H Volume
Top 5 Tokens on PancakeSwap by Volume
Top 5 Trading Pairs on PancakeSwap by Volume
Thena
Thena is the second-largest DEX on the BNB Chain. The native token of the protocol is $THE.
Thena Stats on BNB Smart Chain (as of March 5, 2025)
Advantages of DEX
- No Intermediaries: The lack of intermediaries removes the risks of centralized control, censorship, and opaque execution methods.
- Non-Custodial: Users retain full control of their funds at all times. There’s no need to trust a third party with private keys.
- Lower Fees: DEXs charge lower fees than CEXs due to the lack of intermediaries. However, fees depend on gas costs, so during periods of high demand, DEX fees increase as gas fees rise.
- Greater Asset Diversity: Many altcoins are only accessible via DEXs, whereas CEXs limit listings based on trading activity and compliance requirements.
- Financial Inclusion: Anyone with an internet connection and a self-hosted wallet can access a DEX, bypassing restrictions imposed by centralized platforms. No KYC/AML requirements improve accessibility but raise regulatory concerns.
Disadvantages of DEX
- Smart Contract Risk: DEXs rely on smart contracts, which can have bugs, vulnerabilities, or exploits. Poorly coded contracts can be hacked.
- Liquidity Risk: Some DEX trading pairs suffer from low liquidity, causing poor trading conditions.
- MEV Attacks: Since DEX transactions are public pre-execution, they are vulnerable to MEV (maximal extractable value) attacks. Read our blog on MEV attacks to find out more about these types of attacks.
- Fees Dependent on Network Congestion: As previously mentioned, DEX fees are dependent on network gas fees. Higher demand and network congestion can lead to higher fees.
- Scalability Limits: DEXs are restricted by the underlying blockchain network they are running on. A slower blockchain leads to slower transaction speeds.
- User Experience Challenges: DEXs can be hard to use and challenging for new users as they are required to manage their own wallets, private keys, and on-chain transactions. This complexity creates a steep learning curve compared to the simple and user-friendly interfaces of centralized exchanges.
- Fiat On/Off-Ramp Limitations: DEXs currently do not support direct fiat transactions, making it difficult for users to convert between crypto and traditional currencies.
How Do I Get Comfortable Using DEXs?
If you are used to CEXs, jumping over to a DEX can be quite challenging. Alongside doing your own research DYOR, here are some things to keep in mind:
- Get a Wallet: Start with a browser wallet like MetaMask. Fund it by transferring crypto from your CEX account.
- Choose a Reliable DEX: Use a well-known platform like PancakeSwap or Thena for better liquidity and smoother trades.
- Pick Liquid Trading Pairs: Trade popular pairs that have sufficient liquidity.
- Start Small: Make small trades first to understand how it works.
You can also check out useful step-by-step guides from the DEXs like this one from PancakeSwap to help walk you through the whole process.
