In contrast to conventional financial transactions, which are opaque and conducted via middlemen that provide a very limited level of visibility into their activities, DEXs provide total transparency regarding the flow of money and the systems supporting exchange. DEXs can also lessen systemic centralization problems in the bitcoin ecosystem because user funds don't go via a third party's cryptocurrency wallet while trading.
Decentralized Exchange Anonymity Trading Since DEXs in their purest form use only blockchain information, all you need to share in order to use a DEX is a public address. Most centralized exchanges require a complete signup process with name, email, and even bank account information. Even anonymous crypto-to-crypto exchanges still require location information and other personal details to comply with government regulations and restrictions. That said, if DEXs come to greater prominence, they’ll likely meet up against regulators. Most DEX creators plan to say they’re only releasing open source software and are not liable for what the community does with that software, thus avoiding the KYC and AML issues.
Automated market makers are the most widely used type of DEX as they enable instant liquidity, democratized access to liquidity provision, and—in many cases—permissionless market creation for any token. An AMM is essentially a money robot that is always willing to quote a price between two (or more) assets. Instead of an order book, an AMM utilizes a liquidity pool that users can swap their tokens against, with the price determined by an algorithm based on the proportion of tokens in the pool.
DEX Control of Funds DEXs are generally, but not necessarily, non-custodial. As a result, users keep control of their funds throughout the entire transfer process until the moment of exchange, when a smart contract executes the signed trade. No more “funds are safu” messages. Keeping your funds safe is your own responsibility of a DEX.
As there are no custodians involved and users can participate using their self-hosted wallets, DEXs reduce counterparty risk. DEXs can also reduce some of the systemic risks of the blockchain industry by reducing the amount of capital concentrated in the wallets of a small number of centralized exchanges. In 2014, the Mt. Gox centralized exchange handled a significant portion of all Bitcoin trading volume before it abruptly ceased operations amid the loss of hundreds of thousands of bitcoin. DEXs also help increase financial inclusion. While there have been cases of specific user interfaces limiting access based on geographic location or other factors, accessing a DEX’s smart contracts only requires an Internet connection and a compatible self-hosted wallet.
