Basics
What is a DEX?
A DEX, short for decentralised exchange, is a marketplace that runs on a blockchain instead of on a company's servers. You connect your own wallet, swap one asset for another and keep control of your keys throughout. The mechanics behind the price, however, differ fundamentally from a traditional exchange. Below we explain how a DEX works, where the costs sit and which risks come with it. It is explanatory material, not investment advice.
How it differs from a centralised exchange
On a centralised exchange you deposit money or crypto with a company that then tracks your balance in an internal ledger. Your assets only leave the platform when you withdraw. On a DEX there is no such ledger: every swap is a blockchain transaction executed by a smart contract whose rules are fixed in advance and publicly auditable.
That difference shapes the risk profile. No company can freeze your account or go bankrupt holding your balance, but equally no support desk can reverse a mistaken transaction. Trading on a DEX means accepting that responsibility sits entirely with the user.
- Centralised exchange: custodian holds your keys, KYC required, support available
- DEX: your own wallet, on-chain settlement, no intermediary and no undo button
How prices are formed on a DEX
Most DEXs use an automated market maker (AMM). Instead of matching buyers and sellers through an order book, you trade against a pool holding two assets. A mathematical formula sets the price from the ratio between those reserves: take asset A out of the pool and A becomes scarcer, and therefore more expensive.
The larger the pool, the less a single order disturbs that ratio and the more stable the price stays. This effect is called price impact, or slippage, and for larger orders it usually matters more than the fee the DEX charges.
Costs: trading fee, network fee and slippage
A swap on a DEX has three cost components. The pool charges a trading fee, typically between 0.05% and 1%, which goes to liquidity providers. On top of that you pay a network fee to the blockchain itself, which varies widely by chain and by the minute. Finally there is slippage: the gap between the price you saw and the price you actually got.
For small amounts on a busy network, the network fee can outweigh the trading fee. For large amounts in a thin pool, slippage is usually the dominant cost.
- Pool trading fee, expressed as a percentage per swap
- Network fee (gas), depending on congestion
- Slippage, depending on order size relative to pool depth
Risks to understand before you start
Anyone can create a market on a DEX, including for a token designed to defraud. A token carrying the name of a well-known project means nothing; only the contract address identifies what you are actually buying. Always verify that address through an independent source.
There is also the risk of smart-contract bugs and of transactions being front-run in the network's queue, leaving you with a worse price. A tight slippage limit and small test transactions limit the damage from both.
Frequently asked questions
Do I need KYC on a DEX?
A pure DEX does not ask for identity verification because you trade directly from your own wallet. Services that add fiat rails or hosted wallets do fall under EU rules and will ask for verification.
Can I deposit euros on a DEX?
No. A DEX only handles crypto native to its chain. Starting from euros means using a regulated service first, then moving those balances onto the DEX.
What happens if I send to the wrong network?
Tokens sent to the wrong network or an unsupported address are often unrecoverable. Always confirm both the network and the address, and send a small test amount first.
Is a DEX cheaper than a centralised exchange?
It depends on size, network and pool depth. For small orders on an expensive chain a centralised venue is often cheaper; for tokens listed nowhere else a DEX may be the only option.
Read next
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