Decentralized exchanges (DEX) are a type of cryptocurrency exchange which allows for direct peer-to-peer cryptocurrency transactions to take place online securely and without the need for an intermediary.
In transactions made through decentralized exchanges, the typical third party entities which would normally oversee the security and transfer of assets (e.g. banks, stockbrokers, online payment gateways, government institutions, etc.) are substituted by a blockchain or distributed ledger. Some common methods of operation include the use of smart contracts or order book relaying, although many other variations are possible and with differing degrees of decentralization.[1][2]
Because traders on a decentralized exchange often do not need to transfer their assets to the exchange before executing a trade, decentralized exchanges reduce the risk of theft from hacking of exchanges,[3][4] but liquidity providers do need to transfer tokens to the decentralized exchange. Decentralized exchanges can also prevent price manipulation or faked trading volume through wash trading, and are more anonymous than exchanges which implement know your customer (KYC) requirements.
There are some signs that decentralized exchanges have been suffering from low trading volumes and market liquidity.[5] The 0x project, a protocol for building decentralized exchanges with interchangeable liquidity attempts to solve this issue.[6]
Due to a lack of KYC process, and no way to revert a transaction, users are at a loss if they are ever hacked for their passwords or private keys.[7]
Decentralized exchange - Wikipedia