What Is a DEX (Decentralized Exchange): How It Works, Risks and How to Start
Decentralized exchanges explained: how they differ from centralized exchanges, AMMs and on-chain order books, wallets, network fees, slippage, risks and first steps. With links to Hyperliquid, dYdX and Uniswap.
In short: a DEX is an exchange where you trade straight from your own wallet through smart contracts, with no account and no handing your funds to the exchange. You keep control, but you carry all the risk: contract bugs, fake tokens, network fees and no customer support to recover a mistaken transfer.
CEX versus DEX
On a centralized exchange (CEX) such as Kraken or Bybit EU you have an account, pass identity checks and the exchange holds your funds. On a decentralized exchange (DEX) you connect a wallet and your funds stay in it until you send a transaction. Control and responsibility are yours.
| CEX | DEX | |
|---|---|---|
| Account and ID checks | yes | usually no |
| Who holds the funds | the exchange | you, in your wallet |
| Customer support | yes | none in the usual sense |
| Fees | trading fees | pool or trading fee plus network (gas) fee |
| Regulation | for example a MiCA licence | often outside regulation |
Two ways a DEX works
AMM (automated market maker)
Uniswap and similar DEXs have no order book. You trade against a pool of tokens supplied by liquidity providers, and a formula sets the price from the ratio of tokens in the pool. Providers earn part of each trade's fee. On Uniswap v2 the fee is 0.30%, on v3 the standard tiers are 0.05%, 0.30% and 1%, and on v4 a pool creator can choose any fee. Details in our Uniswap guide.
An order book on a blockchain
Hyperliquid and dYdX work like a classic exchange with an order book, but they run on a blockchain and trade perpetual contracts with leverage. Their fees use the same maker and taker structure as a CEX. See Hyperliquid and dYdX.
What you need
- A wallet. Never share your seed phrase (12 or 24 words) and keep it offline. See the glossary.
- Crypto for network fees (for example ETH on Ethereum).
- Money you can afford to risk. Start small.
Risks
- Smart contract bugs. A flaw can drain funds with no way to recover them.
- Fake tokens and rug pulls. Anyone can create a token and a pool. Verify the contract address on the project's official site. See how to spot a crypto scam.
- Approvals. Approving a token lets a contract move it. Revoke approvals you no longer need.
- Slippage and network fees. The price can change between sending and execution. On Ethereum fees can exceed the value of a small trade.
- Leverage. On perpetual DEXs you can lose your entire deposit. See our live Liquidation War.
- No protection. You do not get the protections of regulated exchanges and brokers.
Taxes
Trading on a DEX has tax consequences that depend on your country. Keep your own transaction history, because a DEX issues no statements.
Frequently asked questions
Is a DEX safer than a CEX?
Not in general. A DEX removes the risk that an exchange loses or freezes your funds, but adds the risks of contract bugs, fake tokens and your own mistakes.
Do I need identity verification?
Most DEXs do not require it, but availability can differ by country. Check that the service is available and legal where you live.
Which DEX should I choose?
Uniswap is the best known for swapping tokens, Hyperliquid and dYdX for perpetual contracts. None of this is a recommendation to trade.
Not investment advice. Using a DEX is risky and losses are often irreversible.
