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.