A DEX is a type of crypto exchange that allows you to trade tokens directly from your wallet. No sign-ups, no custodial wallets, no middlemen. Why does that matter? Because it puts you in control of your assets. You’re not trusting a company to hold your crypto—you’re trusting code.

If you’re serious about crypto, understanding how DEXs work isn’t optional. It’s essential.

At the center of most DEXs sits a liquidity pool—a digital pot containing pairs of tokens (like ETH/USDT). Traders tap into these pools when they swap tokens. Think of it like a communal water tank. If enough people fill it (liquidity providers), others can draw from it (traders).

Why would someone lock their crypto in a pool? Simple: rewards.

Liquidity providers (LPs) earn a small fee every time someone trades using their liquidity. Over time, this can add up—especially on high-volume pools. It’s like earning rent from letting others use your digital assets.

Traditional exchanges use order books—lists of buy and sell orders. But DEXs needed something different. Enter Automated Market Makers (AMMs).

AMMs use algorithms to determine token prices based on the ratio of tokens in a liquidity pool.

One famous formula? The constant product formula: (Token A amount) × (Token B amount) = Constant (k). In short: As you buy one token, its price rises while the other falls.

Some of the biggest AMM-based DEXs include:

• Uniswap (Ethereum)
• PancakeSwap (BNB Chain)
• SushiSwap (Multi-chain)

Each uses similar AMM logic but on different blockchains with unique tokens.

So, what does an actual trade look like?

1. Connect Your Wallet (like MetaMask or Trust Wallet).
2. Choose Tokens: Select what you want to swap.
3. Set Trade Details: Review slippage, price impact, and gas fees.
4. Confirm in Wallet: Your wallet will pop up for final confirmation.
5. Wait for Block Confirmation: Depending on the network, this can take seconds or minutes.
6. Trade Complete! Your new tokens appear in your wallet.

Two terms that often confuse beginners:

• Slippage: The difference between the expected price and the executed price of your trade.
• Price Impact: How much your trade size moves the market price in the pool.

Trading small amounts? You’ll hardly notice. Trading big? Expect more slippage and price impact. Tip: Always check slippage tolerance settings before confirming a trade.

Every action on a blockchain costs gas—think of it as a transaction fee.

• On Ethereum, gas fees can get pricey during peak times.
• On BNB Chain or Polygon, fees are much lower.

Before trading, check current gas fees to avoid paying more than your trade is worth!

Let’s get real. DEX trading isn’t risk-free. Here’s what to watch for:

• Impermanent Loss: LPs may end up with less value than expected due to price shifts.
• Smart Contract Bugs: Vulnerabilities can lead to losses.
• Scam Tokens: Always verify token contracts to avoid fake assets.
• Front-Running Bots: On-chain bots can see your transaction and jump ahead to profit.

Knowledge = Defense. Be informed before you trade.

DEXs are the future of crypto trading. With innovations like liquidity pools, AMMs, and smart contracts, they offer freedom and control never seen before in finance. But with freedom comes responsibility. The more you understand the inner workings, the safer and smarter you’ll trade.

So…ready to dive deeper into DEX crypto?

To learn more about the basics of DEX check out our article What Is a DEX? A Beginner’s Guide to Decentralized Exchanges.