How Decentralized Exchanges (DEXes) Work – A Technical Deep Dive
1. Introduction: What Is a DEX? A decentralized exchange (DEX) is a system that allows users to trade cryptocurrencies directly with each other without relying on a centralized intermediary like Binance, Coinbase, or Kraken. Instead of trusting a company to hold funds, match trades, and settle balances, users interact with smart contracts deployed on a blockchain. At a high level: Centralized exchange (CEX): You deposit funds → the exchange controls custody → trades happen in their private database → withdrawals are processed later. Decentralized exchange (DEX): You keep custody → you interact with smart contracts → trades settle directly on-chain or via cryptographic off-chain systems. The technical challenge of DEX design is to replicate the core functions of an exchange—price discovery, liquidity, order matching, and settlement—without centralized control. To understand how DEXes work, we need to break them into core components: Blockchain infrastructure Smart contracts Wallet ...