Recently, a friend asked me what exactly a DEX is, and it seems many people still have only a partial understanding of decentralized exchanges. In fact, DEXs aren’t as complicated as you might think. Today, let’s talk about this topic.

Simply put, a DEX is a decentralized exchange, and its full English name is Decentralized Exchange. Its core features are permissionless, non-custodial, and in most cases you don’t need KYC or registration—you just connect your wallet and trade directly. This is completely different from centralized exchanges.

What’s interesting is that the development speed of DEXs over the past few years has really been fast. I remember that a few years ago, the trading volume share of DEXs was less than 1%. Later it gradually increased, and as demand for decentralized trading grew, more and more people started to experience DEXs—mainly because it truly has unique advantages.

DEXs can roughly be divided into two types. One is order book-based trading, where the buying and selling sides are directly matched—this model is actually more like a traditional exchange. The other is an automated market maker model based on liquidity pools, and this is where DEXs truly shine.

Using order book DEXs feels pretty much like using centralized exchanges—it’s just that login is replaced with connecting your wallet. You submit limit orders or market orders, and the system helps match you with a counterparty to execute the trade. EthFinex and IDEX, for example, are representatives of order book DEXs. Anyone who has tried IDEX on Ethereum should be able to feel this: a transaction is completed through a smart contract, and your assets move directly in and out of your wallet. That trustless feeling really is kind of cool.

However, order book DEXs have a problem: they don’t really work well with DeFi tokens. Early DeFi projects often had insufficient liquidity. If you use order book trading, price volatility can be significant—so it ends up scaring traders away. That’s why the DeFi space needs a different trading model.

This is why the automated market maker (AMM) model emerged. AMM isn’t a new concept; it has existed for a long time in traditional finance and academia. It’s just that it only recently became popular in the crypto space. The job of a market maker is to act as a counterparty for both buyers and sellers and to maintain liquidity for the exchange. Traditional market makers profit by trading assets through their own accounts, while also creating liquidity for other traders.

An automated market maker uses algorithms to simulate this process. DEXs pool crypto assets into liquidity pools, and then use deterministic algorithms to price and match trades. So what are the benefits? Anyone can become a liquidity provider—by supplying liquidity to a DEX—and earn trading fees.

At present, DEXs that use the AMM model maintain the highest liquidity and trading volume in the market. Uniswap is the leader in this space. It allows everyone to provide liquidity to the exchange and earn fees. Later, innovators such as Bancor, Balancer, and Curve appeared. They have been continuously optimizing AMM technology to provide real-time liquidity for various digital assets.

Unlike order book DEXs, AMMs don’t require specifying the seller’s price or the buyer’s quantity. Instead, they automatically determine pricing through algorithms. This model is secure and reliable, has no geographic restrictions, and doesn’t require custodial assets.

To be honest, DEXs really changed how I understand trading. The combination of decentralized exchanges and DeFi has pushed the entire ecosystem onto a fast track of development. As long as you’re willing to spend a bit of time experiencing it, you’ll find that decentralized trading isn’t actually that complicated. Try it for yourself, and you’ll discover that the world of DeFi is quite interesting.