The Evolution of Decentralized Exchange: Risks, Benefits, and Oversight

Abstract

A decentralized exchange or DEX is an application deployed on a blockchain that allows investors to exchange digital assets at pricing terms determined by a preset exchange rate formula. This technology has several unique features, including accessibility to all investors, transparency of pricing, and simultaneity of execution and settlement. Notably, trading via a DEX is feasible for any asset tokenized on a blockchain. In turn, given that assets such as stocks and bonds could be tokenized easily, it is particularly important to understand the risks posed by DEXs. This paper examines both the benefits and risks to investors from DEXs, explores the role of private and public liquidity pools and analyzes possible regulatory approaches. 

Keywords: Decentralized exchange, DEX, Decentralized finance, DeFi, Centralized exchange, CEX, Smart contracts, Uniswap, Limit-order book, Front running, Sandwich attack, Just-In-Time liquidity, Trading fees, Slippage, Bid-ask spread, Liquidity, Proposer, Builder, Relayer, Private pools