Exchanges
A decentralized exchange is a smart contract that holds liquidity and lets anyone trade against it directly from their own wallet. There is no account, no identity check and no company holding your funds. Most use an automated market maker, where prices come from a formula rather than from an order book.
The automated market maker, explained properly
Traditional exchanges need a buyer and a seller to meet. An AMM removes that requirement entirely by keeping a pool of both assets and pricing trades with a formula.
The classic version keeps the product of the two balances constant. If a pool holds 10 ETH and 30,000 USDC, their product is 300,000, and every trade must keep it there.
You buy 1 ETH from the pool
You take ETH out, so the pool now needs enough USDC coming in to keep the product constant.
The formula sets the price
With 9 ETH remaining, the pool needs 33,333 USDC. So you pay about 3,333 USDC, which is above the starting price of 3,000.
That difference is price impact
Your own trade moved the price. On a large pool the effect is tiny. On a small pool it is brutal.
The next buyer pays more
The pool has less ETH, so ETH is now more expensive. This is how an AMM discovers price with no order book at all.
Where the liquidity comes from
The pool is funded by liquidity providers who deposit both assets and earn a share of every trading fee. It is genuinely open: anyone can provide liquidity for any pair.
The catch is impermanent loss. When the two assets diverge in price, the pool rebalances toward the one that fell, and you end up with more of the loser and less of the winner than if you had simply held both.
Types of DEX
AMM
Pools and a pricing formula. Uniswap, PancakeSwap, Aerodrome. The most common design by far.
Aggregator
Does not hold liquidity. Searches every venue and splits your order for the best price. Jupiter, 1inch, KyberSwap.
Order book DEX
A real order book, onchain. Needs a very fast chain to be practical. Hyperliquid, dYdX.
Stable AMM
A curve tuned for assets that should trade near par. Almost no slippage on stablecoin swaps. Curve.
The five real risks
| Risk | What happens | How to reduce it |
|---|---|---|
| Fake front end | A pixel perfect clone reached through a search ad drains your wallet | Bookmark the real site and navigate from the bookmark, always |
| Wrong token | Anyone can create a token called USDC. You buy the wrong one | Paste contract addresses from an official source, never from search |
| Unlimited approvals | A standing permission that outlives your trade | Approve exact amounts and revoke old approvals |
| Sandwich attacks | A bot trades around your swap and takes the difference | Keep slippage tight, use an aggregator with protection |
| Contract exploit | A bug drains the pool | Prefer protocols that are years old and heavily audited |
Which DEX to use
It mostly depends on which chain you are on.
| Chain | Best starting point | Also worth knowing |
|---|---|---|
| Ethereum | Uniswap | 1inch for protection on larger trades |
| Base | Uniswap | Aerodrome holds most of the liquidity |
| Solana | Jupiter | Raydium is where new tokens list |
| BNB Chain | PancakeSwap | Dominant by a wide margin |
| Arbitrum | Uniswap | SushiSwap and Camelot are also deep |
| Stablecoin swaps | Curve | Purpose built, almost no slippage |
| Across chains natively | THORChain | Real BTC for real ETH, no wrapping |
Common questions
Do I need an account to use a DEX?
No. You connect a wallet and trade from your own address. There is no sign up, no email and no identity verification.
Why do I have to approve a token before swapping?
Token standards require you to grant a contract permission before it can move your tokens. It is a safety feature. The risk is granting unlimited permission and forgetting.
What is slippage tolerance?
How much worse than quoted you will accept. Too low and the trade fails, too high and sandwich bots take the difference. 0.1 to 0.5 percent is normal for major pairs.
Are DEXs legal?
Using one is legal in most jurisdictions including the United States. Some front ends restrict certain regions. Tax obligations apply to your trades either way.
Where to go next
Do your first swap with us watching
We walk through wallet connection, network switching, approvals, slippage and the block explorer check afterward. On a cheap chain, so a mistake costs a cent.