Decentralized exchange (DEX):a virtual asset exchange which can executes orders without requiring a centralized “fail-safe”. Decentralized exchanges allow peer-to-peer trading of cryptocurrencies, digital securities, and other virtual assets. DEX architectures do not rely on a third-party service to hold customers’ funds. Rather, trades occur directly between users (peer-to-peer) through an automated, smart contract process. Such a system can be established by creating proxy tokens (virtual assets that represent fiat currency, physical or digital asset) or assets (can represent shares in a company), or through a decentralized multi-signature escrow system, among other solutions. This system contrasts with the centralized model of virtual asset exchanges in which users deposit their funds and the exchange issues an ‘IOU’ that can be freely traded on the platform. When a user asks to withdraw his funds, these are converted back into the cryptocurrency they represent and sent to their owner.
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