How Decentralized Exchanges Evolved and Why It's Good for Users

Decentralized exchanges have improved usability and user experience, becoming a good option for investors in the crypto space.

Decentralized exchanges (DEXs) first appeared in the cryptocurrency industry in 2014, allowing users to trade a large number of peer-to-peer assets.

However, early iterations of these platforms might be difficult to use. But, since their inception, the developers have worked to make them easier and more accessible for users.

Decentralized exchanges work by using smart contracts to fulfill orders placed by traders, allowing users to trade directly with each other instead of relying on a centralized platform. Unlike a centralized exchange (CEX), when traders engage with a DEX, their funds are not stored on the exchange. Instead, users initiate transactions directly, with tokens taken and deposited into their non-custodial wallets.

In the past, most DEXs used order books, a system that keeps a record of all open buy and sell orders placed on an exchange. While many decentralized exchanges still use order books today, Automated Market Maker (AMM) DEXs have grown in popularity due to their simplicity and increased liquidity.

AMMs use smart contracts and liquidity pools to improve the liquidity of decentralized exchanges while managing the price of a token each time a transaction is made. When traders access an AMM-based DEX, they interact with liquidity pools that store multiple pairs of tokens.

For example, if a trader wants to exchange Ether (ETH) for USD Coin (USDC), they will interact with a pool that stores equal amounts of both tokens.

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These pools are filled by liquidity providers who earn a portion of the fees generated by the DEX in return for providing liquidity. This allows trades to be settled directly without waiting for an order to be filled.

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