Glossary

Decentralized Exchange (DEX)

1 min read

A decentralized exchange (DEX) is meant to facilitate the exchange of bitcoin without forcing users to sacrifice privacy or custody to an exchange. DEXs offer access to their exchange without Anti-Money Laundering (AML) procedures, meaning they do not collect a user’s government-issued ID, address, or phone number.

Decentralized exchanges vary in the full extent of their decentralization; some are simply non-custodial, but maintain a central authority to arbitrate disputes while others are fully decentralized protocols. Most DEXs also execute bitcoin trades directly between users without taking control of the bitcoin as middlemen.

Often, decentralized exchanges will require the bitcoin seller to deposit bitcoin into a 2-of-3 multisig address, where each party - the buyer, the seller, and the DEX, holds a key. When the seller receives payment, the buyer and seller then co-sign a transaction sending the bitcoin from the multisig address to the seller’s address. If either party breaches the agreement, the aggreived party can appeal to the DEX, who can use their key to resolve the dispute.

Related Terms
Exchange
An exchange is an institution which acts as a market-maker between parties who wish to buy and those who wish to sell. Exchanges simply facilitate trades between parties for a fee.
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Peer-to-Peer (P2P)
A peer-to-peer network is one in which members can interact directly with one another without relying on third parties for approval or support.
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Multisig
Bitcoin can be sent to an address such that spending that bitcoin requires multiple signatures from different private keys. This setup allows joint custody of funds, and can be as simple or as complex as needed.
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Know Your Customer (KYC)
Know Your Customer Laws, Anti-Money Laundering, and Counter-Terrorism Financing Laws are all intended to combat illicit money transfers by mandating that all bank accounts be identifiable to individuals or organizations.
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Anti-Money Laundering (AML)
Anti-Money Laundering (AML) is a category of laws and regulations that are intended to prevent money laundering, terrorist financing, tax evasion, and other illicit activities.
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M-of-N
M-of-N describes a multisig setup in which N public keys are given joint custody of bitcoin, and M signatures from any of those N keys are required in order to spend the bitcoin.
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