DEX vs. CEX: Why are more and more investors choosing decentralized trading?

When it comes to DEX (Decentralized Exchanges), many people’s first reaction is: “I’ve heard it’s complicated.” Actually, that’s not the case. To understand DEX, you only need to grasp one core difference: Centralized exchanges are operated by companies, while DEXs are operated by smart contracts.

What exactly is a DEX? Simply put

The role of a DEX is the same as that of traditional exchanges—helping you buy and sell crypto assets. The difference is that there are no intermediaries.

In a centralized exchange, your coins are stored on the platform, which controls your private keys and matches buy and sell orders. On a DEX, you trade directly from your wallet, with your private keys always in your control, and smart contracts automatically execute trades.

This is why there’s a golden rule in crypto: “No private key, not owned.” On a DEX, this becomes a reality.

How does a DEX work? Unveiling the underlying mechanism

Smart Contract: Automated Trader

A DEX doesn’t have human traders but uses smart contracts—a piece of self-executing code. When you click the “Swap” button, the contract automatically receives your tokens, calculates the price, and returns the other tokens. The entire process takes just a few seconds and is fully transparent.

Liquidity Pools: Who funds the trades?

This is the key. Without liquidity providers, a DEX is just an empty shell—unable to facilitate any trades.

Therefore, DEXs pool funds from many investors to form liquidity pools. For example, an ETH/DAI pool contains both Ethereum and DAI stablecoins. This pool is the foundation of trading.

Anyone can deposit two types of tokens into the pool and earn trading fees and additional rewards. This is the core of liquidity mining and yield farming—a mechanism that centralized exchanges cannot offer.

AMM: How is the price generated?

AMM (Automated Market Maker) is the brain of a DEX. It uses a mathematical formula to determine prices.

Uniswap V2’s formula is simple: x × y = k

• x = amount of ETH in the pool
• y = amount of DAI in the pool
• k = constant

Each time you swap, this ratio automatically adjusts, and the new ratio becomes the new price. The larger your trade relative to the pool, the more price impact (slippage) you experience—that’s slippage.

Why do DEXs exist? Historical background

Centralized exchanges have a simple but fatal flaw: single point of failure. What if the platform gets hacked? What if it goes bankrupt? What if it manipulates the market?

DEXs emerged as a counterforce to this model. Their advantages include:

• 📊 Full transparency: Everything on-chain can be verified—orders, trades, fund flows are all public
• 🔐 Self-custody: No one can freeze your account or seize your coins
• 🚀 No approval needed: New tokens can be listed immediately without waiting for an approval from an authority
• 🌍 Global censorship resistance: Anyone anywhere can participate

These advantages have attracted a large number of investors to switch to DEXs.

Advantages and pitfalls of DEXs (must-know)

Types of DEXs

1. AMM-based DEX (most common)

Uses liquidity pools and formulas to determine prices. Uniswap is representative, supporting any ERC-20 pair. You trade directly with the pool, no need to wait for a counterparty.

2. Order Book DEX

Similar to traditional exchanges, using limit orders and matching. Examples include dYdX (derivatives) and the former Serum. Users place buy and sell orders, which are matched automatically.

3. DEX Aggregators

Not an exchange itself but very practical. 1inch and OpenOcean scan multiple DEXs simultaneously to find the best prices, even splitting your order across different platforms.

4. Hybrid Exchanges

Combine the advantages of centralized and decentralized exchanges. For example, orders are processed off-chain but settled on-chain, aiming to balance speed and transparency.

5. L2 DEXs

With the rise of Layer 2 networks (Arbitrum, Optimism, zkSync, Base, etc.), many DEXs are migrating to these networks. Benefits: lower fees, faster transactions, security still guaranteed by Ethereum. By 2025, most of Uniswap’s trading volume will be on L2.

Fees on DEXs: Not just one type

Be prepared before trading. DEX fees consist of several parts:

Part 1: Swap fee (0.1%–0.3%)

Most DEXs charge per transaction. Uniswap charges 0.3%, Curve’s stablecoin pools have lower fees. Almost all of this goes to liquidity providers; the platform itself takes little.

Part 2: Network fee (Gas)

This is the main cost. Every transaction is a blockchain transaction, requiring Gas. On Ethereum, it can be a few dollars or more; on Arbitrum or Solana, just a few cents.

Part 3: Slippage

Not an official fee but costs you money. If your trade is large relative to the pool, it will push the price, and you’ll receive fewer tokens than expected. Smaller pools and larger trades mean higher slippage.

Total cost: Swap fee + Gas + Slippage + MEV costs

On cheaper chains, it might be just a few basis points, but on Ethereum mainnet, it can eat up several percentage points of your gains.

The landscape of DEXs in 2025: Who’s leading?

Data speaks. According to latest stats, DEXs now account for 21% of global crypto spot trading volume, up from just 6% in 2021.

The most popular DEXs include PancakeSwap, Uniswap, Fluid, and Aerodrome, dominating on BNB Chain, Ethereum, Base, and Blast networks.

As of October 2025, daily DEX trading volume hit a record high of $41.98 billion.

This indicates a trend: more and more investors are trading directly on-chain, moving away from reliance on centralized platforms.

What tokens are on DEXs? Who’s using them?

DEXs are incubators for new tokens and niche projects. Here you’ll find:

• New Layer 1 and Layer 2 tokens (Monad, ZetaChain, Berachain, etc.)
• DeFi governance tokens (Pendle, Aura, etc.)
• Stablecoins and wrapped tokens (LUSD, GHO, wBTC, etc.)
• Yield assets (stETH, rsETH, etc.)
• Meme coins (PEPE, Dogwifhat, etc.)
• AI/RWA/data tokens (Ocean, Fetch.ai, etc.)

But this also means risk: no audits, projects vary in quality, scams and rug pulls are common.

DEX vs. Centralized Exchange: Core differences

Simply put: using a CEX is like depositing money in a bank; using a DEX is like being your own bank. More freedom, but also more responsibility.

5 Major Risks of DEX Trading (Must-know for beginners)

1. Smart Contract Risk

A DEX’s safety depends on its code. If there’s a bug or backdoor, hackers can drain the pool. Although major DEXs undergo security audits, audits are not foolproof.

2. Impermanent Loss

Providing liquidity sounds profitable, but there’s a trap. If the prices of your tokens diverge significantly, you may suffer impermanent loss. Even earning trading fees might not compensate.

3. MEV and Front-running

Bots can see your transactions and insert their own orders before or after yours to profit—this is sandwich attacks. You might notice inexplicable slippage increases.

4. Insufficient Liquidity

Niche tokens often have small pools. A moderate trade can cause huge price swings or fail altogether.

5. Fake tokens and rug pulls

DEXs have no gatekeeping; anyone can create tokens. Scammers create fake coins, honeypots, or reserve ownership to rug pull. Beginners are most vulnerable.

5 Iron Rules to Make Money on DEXs

Rule 1: Only trade tokens with sufficient liquidity

Why? Because low-liquidity pools have very fake prices. Many meme coins look cheap but are expensive during actual trading.

💡 Practical tip: Use DEXScreener or GeckoTerminal to check, prioritize pools with TVL at least $100,000 and daily volume at least $5,000.

Rule 2: Check the contract before trading

Most scams aren’t due to the DEX itself but because the token’s contract has backdoors—auto-mint, transfer restrictions, honeypots, etc.

💡 Practical tip: Use DeFiSafety, RugDoc, TokenSniffer, or Etherscan to verify the contract. Confirm it’s open-source and has no warning flags.

Rule 3: Understand impermanent loss before liquidity mining

Many think LP is a free lunch. But big price swings can cause heavy losses.

💡 Practical tip: Use APY.vision or DefiLlama’s LP tools to simulate beforehand. If you must provide liquidity, prefer stablecoin pairs on Curve to avoid impermanent loss.

Rule 4: Manually set slippage, don’t be greedy

High slippage means giving money to MEV bots.

💡 Practical tip: Set slippage not exceeding 0.5% for stablecoin pairs, and 1-2% for volatile tokens. Unless trading extremely obscure coins, don’t go beyond.

Rule 5: Learn to use aggregators but don’t blindly rely

Aggregators can find better prices, but not always cost-effective. Extra Gas fees for small trades might offset benefits.

💡 Practical tip: For under $1,000, use Uniswap or Jupiter directly; for over $1,000 or cross-chain trades, consider 1inch or Matcha.

The future of DEXs: 2025 and beyond

DEXs are accelerating growth. From 6% market share in 2021 to 21% now, the trend is clear.

What drives this? Tighter regulations, higher fees, and increasing user demand for self-custody.

The explosion of Layer 2 makes DEXs cheaper and faster. By 2025, DEX trading volume on Arbitrum, Optimism, zkSync, and Base will grow significantly. Even with expensive Ethereum mainnet Gas, L2 makes DEX accessible to ordinary users.

In summary: DEXs have shifted from niche tools to mainstream choices. More and more people realize a simple truth—if you truly want control over your assets, DEX is your stage.