You may have bought crypto coins on Unsiwap, Sushiswap or Pancakeswap These are not regular crypto exchanges, as they are decentralized exchanges. These types of crypto exchanges are also known as a DEX and run on the blockchain. This means that the platforms are not maintained by central parties.
There are several reasons to use a DEX. The main reason is that the supply of crypto coins on a DEX is greater than on a central exchange. We'll tell you in this article what a DEX is, how it works and how coin listing on a DEX works.
Table of contents
What is a DEX (Decentralized Exchange).
A DEX is a decentralized crypto exchange. In other words, this is a platform running on the blockchain where you can buy and sell cryptocurrencies. Because the blockchain consists of a decentralized network, the crypto exchange on the blockchain is also decentralized.
DEXs work completely automatically. They run as an application on a blockchain and use smart contracts. This also means that a DEX, for example, never has customer service. Therefore, should something go wrong, you won't be able to receive any help. This is why it is important to know how a DEX works before using it.
To buy and sell crypto coins, you will need to connect an external wallet to the DEX. This can be a wallet such as Metamask, as long as it supports the blockchain the DEX is running on.
How does a DEX work?
Of course, a DEX is very different from a central exchange. So is its operation. It is especially important to remember that every process is performed automatically by a smart contract. In addition, it is also important for the community to provide support. After all, without the community, a DEX cannot work.
Automated Market Maker (AMM)
The Automated Market Maker (AMM) is an important component of the DEX. It is on this component that the DEX differs most from the CEX. We will discuss this difference in more detail later in the article.
An AMM is a protocol that handles the pricing and execution of transactions. The moment a user wants to buy tokens, he will have to buy these tokens with another token. This is because it is not possible to use fiat currencies on a DEX. The tokens that are exchanged for each other are also called a trading pair. These trading pairs are predetermined. Therefore, you cannot always buy tokens with other tokens, and you are dependent on the trading pairs that others have created.
The AMM will determine what a trading pair's ratio looks like. This ratio is always and everywhere the same, depending on when users want to make the trade. Thus, a user cannot enter a price or limit order himself, but will have to agree to the price set by the AMM.
After the user agrees to the price, the "token swap" will take place. This is the exchange of tokens between the user and the liquidity pool. In fact, the tokens of the DEX are kept in a liquidity pool. This is a smart contract with wallet address, to which crypto tokens are linked.
Liquidity pool
The tokens in a liquidity pool are provided by liquidity providers (LPs). These are users who own tokens but prefer not to sell these tokens. They can earn interest on their tokens by lending them to a liquidity pool. The liquidity pool will then use the tokens to swap them with users of a DEX. Liquidity providers can get their tokens back after a predetermined period of time.
DEX vs. CEX
CEX, which stands for Centralized Exchange, is the counterpart of the DEX. The most widely used crypto exchanges are centralized, such as Binance, Bitvavo and Bitcoin Master. This means that there is a central party (for-profit company) behind the exchange. They handle the development and operation of the platform, delivery of crypto coins and customer service.
A CEX uses the order book, rather than an Automated Market Maker (AMM). The order book involves putting users' orders into a table, and then a match engine tries to match all the orders against each other. So in effect, you buy a token on the central exchange from a seller, rather than from the exchange itself. The exchange primarily serves as an intermediary for executing transactions.
Often a CEX offers more features than a DEX. Consider, for example, the use of limit orders and special analysis. A DEX is limited within the capabilities of the smart contract.
How does a coin listing on a DEX work?
A crypto coin is automatically placed on a DEX as soon as the coin is in the DEX's liquidity pool. The condition is that the crypto coin does run on the same blockchain as the DEX. This is because a DEX cannot simply receive crypto tokens from other blockchains in its liquidity pool.
The creator of a crypto coin will first have to move the coins to his wallet (Metamask, for example). The same wallet must also contain the one other crypto coin. After all, on a DEX, only trading pairs that are predetermined can be traded. The creator of a token must provide these trading pairs himself.
Liquidity can then be provided on the DEX website to the liquidity pool used by the platform. The pool will not immediately recognize the token yet. Therefore, the address of the token contract must be entered. The DEX will then scan the blockchain until it finds the same address.
It is important that the right amount of tokens be placed in the liquidity pool. This determines the initial price of the tokens that the AMM will handle. When the creator places 1 ETH and 1 coin of its own token in the pool, this will be the ratio of the token pair.
After the tokens are placed in the liquidity pool, the pool can be created. This is when the token is officially launched on the DEX. Anyone can then swap tokens according to this trading pair.
This is how coin listing works on a CEX
Coin listing on a central exchange looks very different than on a decentralized exchange. On a DEX, a team of experts will research cryptocurrencies before listing them on the exchange. There are several reasons for this.
For example, a CEX has more responsibilities than a DEX. After all, there is a company behind it that wants to make a profit, but can also be held liable if, for example, they place a scam coin on their platform.
Creators of a cryptocurrency will have to put much more effort into placing their coin on a central exchange than on a DEX. In most cases, a lot of time, often months or years, passes before a CEX makes the decision to place a new crypto coin on their exchange.
Conclusion
A DEX is a decentralized crypto exchange that runs on the blockchain, and differs from the central exchange in many ways. For example, a DEX is not run by a central company looking to make a profit. Instead, everything is done automatically by smart contracts, and the DEX receives support from the community. Tokens, for example, are delivered to the liquidity pool by liquidity providers. The AMM then takes care of setting the price for the trading pair.
Coin listing looks a lot easier on a DEX than on a central exchange. The creator of the token will have to place its coins in a liquidity pool along with the other coin of the trading pair. After the liquidity pool is launched, the token is officially for sale on the decentralized crypto exchange.
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