Decentralized Exchanges

Here is the difference between traditional vs decentralized exchanges

Traditional exchanges are:
  • Centralized
  • Regulated (KYC)
  • Require user deposits
  • User submits a “Buy” or “Sell” order
  • Orders listed in orderbook
  • The centralized exchange matches the buyers with the sellers
  • Liquidity depends on amount of orders
  • Market makers supply liquidity
  • Trade is conducted when a buyer and seller agree
  • Price = price of the most recent trade
Decentralized Exchanges (DEX) are:
  • Part of the DeFi ecosystem
  • Set of automated rules
  • Executed by independent computers
  • Smart contracts
  • Can’t be regulated
  • Open to everyone
  • No need for an account
  • No need to deposit funds
  • No orderbook
  • Liquidity created through liquidity pools
    • Shared pot of funds used by DEXs
    • LP = Liquidity Providers
    • LPs receive pool fees (trading fees) in a process called Liquidity Mining
  • No orderbook
  • Mathematical formula determines the price
  • Automated Market Maker