Try Drift Now

Decentralised exchanges (DEXs) are the bedrock of decentralised finance (DeFi). Not all DEXs are the same, however. This guide will explore what decentralised exchanges are, the different types of decentralised exchanges, and what the best decentralised exchanges are for your specific use case.

What Is a Decentralised Exchange (DEX)?

In finance, there are two categories of exchanges: centralised and decentralised.

While they share many similarities, centralised exchanges (CEXs) are quite different from decentralised exchanges (DEXs).

The most notable difference is that CEXs are owned and governed by centralised entities and are not decentralised, permissionless and do not allow for self-sovereignty.

Decentralised exchanges (DEXs), on the other hand, are trading platforms or marketplaces that run on a blockchain.

Head over to our Centralised Exchange (CEX) vs. Decentralised Exchange (DEX) guide to learn more.

As a result, decentralisation, permissionlessness and self-sovereignty are pillars of a DEX from the outset — anyone can have access to DEXs as long as they have a smartphone and an internet connection.

Moreover, prices in DEXs are determined by AMMs and price oracles and are maintained by market makers, be it external market makers or automated market makers and arbitrageurs.

A more detailed explanation on this can be found in our upcoming "How to arbitrage between DEXs & CEXs" guide.

Generally, there are 3 types of DEXs: AMM-based, Orderbook-based, and Hybrid:

  • AMM-based DEXs use an Automated Market Maker (AMM) as their trading system
  • Orderbook-based DEXs use traditional orderbooks as their trading system
  • Hybrid DEXs utilise a mix of an AMM and orderbook as their trading system

AMM-Based DEX

An automated market maker (AMM) allows you to swap one digital asset for another digital asset — mostly cryptocurrencies such as SOL, ETH or BTC — by utilising liquidity pools.

The price of a digital asset in an AMM is determined by an algorithm which takes into account different aspects of its corresponding liquidity pool.

In order to offer digital assets as close to their real-time value, AMMs incentivise users i.e. liquidity providers to deploy digital assets pairs to liquidity pools.

The more assets a liquidity pool holds, the higher its stability and the closer the quoted prices of an AMM get to the real-time prices.

In an AMM-based DEX, trades are executed through the AMM and its liquidity pools.

Benefits of an AMM-based DEX

  1. Users benefit from an instant access to liquidity through liquidity pools
  2. Users benefit from the trading fees that are generated by the AMM
  3. Users can trade any token — as long as there’s a liquidity pool — as DEXs are not reliant on external market makers

The most notable example of an AMM-based DEX on Solana is Orca.

Orderbook-Based DEX

An orderbook is a list that shows open buy and sell orders of assets at different prices.

Depending on the order type, trades are executed or matched with the best possible price.

Benefits of an orderbook-based DEXs

  1. Users can take advantage of limit orders
  2. Users benefit of lower slippage and lower trading fees
  3. User can see the specific prices points at which liquidity is most concentrated, which might benefit their trading strategy

The most notable example of an orderbook-based DEX on Solana is Mango.

Hybrid DEX

Hybrid DEXs implement both an AMM and an orderbook system.

On most hybrid DEXs, market orders are executed against the AMM.

Limit orders are stored off-chain and are executed against the AMM when the mark price matches the limit price.

Benefits of a hybrid DEXs

  1. Users can take advantage of limit orders
  2. Users benefit from lower slippage and lower trading fees
  3. Users benefit from an instant access to liquidity through liquidity pools
  4. User can see the specific prices points at which liquidity is most concentrated, which might benefit their trading strategy
  5. Users can trade any token — as long as there’s a liquidity pool — as DEXs are not reliant on external market makers

The most notable example of a hybrid-based DEX is Drift.

For more on the mechanisms of Drift, read our latest update here.

AMM-based, Orderbook-based and Hybrid DEXs — hope this was helpful to better understand the differences among the different types of DEXs.

Remember, using DEXs can be risky!

Disclaimer: This guide is strictly for educational purposes only and doesn’t constitute financial or legal advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

Join The Drift Family

We’re excited to keep creating value for Drift users and can’t wait for you to join our community! 🙇🏽🙇🏻

Drop us a message over on Discord and check us out on Twitter 👋

Try Drift Now
Try Drift Now