Wednesday W.O.W - Decentralised Exchanges (DEXs) 💱🌐
[5 min read] Your mid-week bite sized treat on emerging tech on our journey to the Metaverse. Learn about how DEXs are the cornerstone of DeFi, how they work, and how they add value
A nibble of knowledge in your inbox every Wednesday with a simple format:
🇼 What the technology is
🇴 Objective(s) - what is it trying to achieve, with some examples
🇼 Why it is important to users as well as businesses & brands.
This is week 29 of the 520 weeks of writing I have committed to, a decade of documenting our physical and digital lives converge.
As a follow-up to my previous post on DeFi (Decentralised Finance), we will be exploring some of DeFi’s building blocks. DEXs are a cornerstone of how DeFi works. Let’s dive in:
🇼 What is a DEX?
DEXs are like bustling marketplaces where individuals can trade cryptocurrencies directly with one another, without the need for intermediaries such as banks or brokers due to the technology used. DEX volume is 2-5B per day. The biggest is is Uniswap (https://uniswap.org/)
Imagine stepping into a digital equivalent of a farmers market, where local growers set up stalls to trade their fresh produce directly with customers. In this scenario, the farmers represent individual cryptocurrency holders, and the market serves as the decentralised exchange. Just as these farmers bypass the supermarket “middleman”, DEXs enable peer-to-peer transactions, allowing users to retain control over their assets throughout the trading process. There is no one telling people who can and cannot have a stall or be a customer. In the case of a DEX, trust is not needed as the market runs on the “rails” of blockchain technology, which ensures transparency, security, and immutability.
Key features of DEXs include:
Trustless Transactions: DEXs employ smart contracts, eliminating the need to trust a central authority. These self-executing contracts ensure that trades are only completed when predefined conditions are met, guaranteeing a secure and fair environment. There are still bad actors trying to scam however, like a fake website mimicking the real DEX, so there is a certain level of “street smarts” and Web3 safety needed. (start here)
User Empowerment: By operating on a decentralised network, DEXs grant users full custody and control of their funds. This puts the power back in the hands of the individual, fostering financial autonomy and reducing reliance on traditional financial institutions. The downside is there is no customer support, if you lose your keys or make a mistake then there is no recourse!
Enhanced Privacy: Unlike centralised exchanges, which often require users to provide personal information, DEXs prioritise privacy. Transactions are pseudonymous, allowing users to trade without compromising their identities. As you can imagine this is a space where regulation is still catching up.
For those keen to know the mechanics of how it works, this video is really helpful:
🇴 What objectives are DEXs trying to achieve?
Decentralised exchanges strive to achieve several key objectives:
Democratizing Access: DEXs aim to provide financial services to the unbanked and underbanked populations around the globe. Just as mobile phones revolutionised communication by bypassing landlines, DEXs democratise access to financial markets in emerging economies, empowering individuals who were previously excluded.
Removing Central Points of Failure: Traditional exchanges are vulnerable to hacks, manipulation, and censorship, as they operate on central servers. In contrast, DEXs distribute transactions across a network of computers, making them resistant to single points of failure. This is less of a risk in developed economies but corruption in many emerging economies is a real problem.
Promoting Financial Sovereignty: DEXs empower individuals by putting them in control of their finances. They enable users to escape the limitations imposed by geographic boundaries, political persecution, government regulations, and legacy financial systems. Consider a person living in a country with a volatile economy and strict capital controls. By using a DEX, they can freely convert their assets into cryptocurrencies and preserve their wealth, even in the face of economic uncertainty.
User-friendly (aspirational): At present a barrier to entry is usability. There is a learning curve that is high stakes, if you make a mistake you can easily lose your funds. In countries where there is plentiful access to financial services (like NZ), people don’t have the incentive to take the risk. As the space evolves, the decentralised solutions will become more user friendly and TradFi (Traditional Finance) will integrate DEXs into customer-friendly interfaces (for a cut of course).
🇼 Why are DEXs part of the future of money?
DEXs are a key element of DeFi (more on this in my previous post), which is revolutionising the very concept of money and reshaping the future of financial systems. Here are some thoughts about DEXs in particular:
Incentives maximise value to users: DEXs are maintained through a carefully designed incentive structure that motivates participants to contribute to the functioning and security of the platform. Incentives play a crucial role in ensuring the integrity of DEXs. Participants are rewarded for their actions that contribute to the overall ecosystem, such as providing liquidity, validating transactions, and participating in governance decisions. These incentives can come in the form of transaction fees, staking rewards, or governance tokens, aligning the interests of participants with the success of the DEX. By incentivizing active involvement and fostering a collaborative environment, DEXs create a self-sustaining ecosystem that thrives on the collective efforts of its participants. There is no extraction of value from “ticket clippers”.
Innovation and Asset Diversity: DEXs provide a fertile ground for innovation, allowing developers to build new financial instruments and services on the blockchain. This creates an ecosystem of diverse assets and investment opportunities, stimulating economic growth and financial inclusion.
Resilience and Security: The decentralised nature of DEXs enhances the resilience and security of financial systems, especially in times of crisis. With no central point of failure, the risk of hacks or disruptions is significantly reduced. The transparency of blockchain technology enables users to verify transactions and track funds, further strengthening trust in the ecosystem.
That’s all for this week! If you have any organisations in mind that could benefit from learning about emerging technology, be sure to reach out. Educational workshops are one of many consulting services I offer.