How does it work?

They are essentially matchmaking services that link crypto buyers with pools of crypto funds that are available for purchase.

At a conventional cryptocurrency exchange, you start by creating an account and satisfying the site’s Know Your Customer conditions. After you have deposited funds or connected your existing crypto wallet, you can buy, sell, and trade cryptocurrencies, making a quick transaction or building a long-term portfolio.

At a decentralised crypto exchange, you connect your cryptocurrency wallet to software running on the DX website. If you wish to purchase or swap crypto assets, you simply specify what you are looking for. The decentralised exchange app tells you the price, and if you approve, you okay the transaction. You never log in, provide a name or email address, or create an account.

DEX crypto exchanges don’t match you up with an individual seller. Instead, they employ automated market makers, or AMMs, to offer you coins and tokens from a liquidity pool: a quantity of cryptocurrency that other users have made available for a specified period. When you buy crypto at a decentralised exchange, you buy from a liquidity pool.

The AMM approach means you can join liquidity pools by lending funds to them. You can make your crypto funds available for a week, a month, or another specified period. At the end of the period, you get your funds back plus a portion of the transaction fees generated by the liquidity pool. It’s like buying a government bond.

Sophisticated DEXs give you lots of control over how you participate in a liquidity pool. For example, you might make tokens available only within a specific price range. Sophisticated traders tweak these options to boost their profits.