Decentralised Exchange (DEX) Intermediate

A DEX runs on smart contracts deployed on a blockchain, which manage trades automatically instead of relying on a company's internal order-matching system. Many DEXs use liquidity pools and an automated market maker formula to price trades, rather than a traditional order book that matches individual buyers and sellers. To trade, a user typically connects a self-custody wallet, approves a transaction, and the trade settles directly on-chain once the smart contract executes it.

This is a structural contrast with centralised exchanges, which take custody of user funds and usually require identity verification before trading. Because a DEX interacts directly with a smart contract rather than a company's books, it typically doesn't take custody of funds and often skips identity checks entirely. That comes with trade-offs worth understanding: users are fully responsible for their own wallet security, since there's no company account recovery if a private key is lost; every trade costs a network transaction fee; smart contracts can contain bugs or be exploited despite audits; and thinner liquidity pools can cause noticeable price impact, known as slippage, on larger trades. None of this makes a DEX inherently unsafe, but it shifts responsibility for security and due diligence onto the individual user rather than a custodian.