Decentralized Exchanges (DEXs) are quickly becoming popular for digital asset traders and investors. These digital trading platforms operate on a blockchain and are not controlled by any single entity, offering increased security and transparency compared to traditional centralized exchanges (CEXs). However, DEXs can be more complex to use and often have lower liquidity than CEXs. This guide will explore the basics of DEXs with easy-to-understand language.
How old-school DEXs work?
There are two main types of DEXs: those that use an order book and those that use an automated market maker (AMM).
An order book DEX works like a traditional stock exchange, matching buyers and sellers directly but without a centralized hub acting as an intermediary and taking control of funds. For example, if someone is selling Token A for 1000 of Token B, the Defi exchange platform will match them with someone looking to buy under those same terms. Alternatively, users can also transact at the current market price and automatically be matched with a counter-order.
AMM DEXs, on the other hand, use a smart contract called a “liquidity pool” to facilitate trades. A liquidity pool is a smart contract that holds a reserve of two or more assets and allows users to exchange them in a decentralized manner. The assets in a liquidity pool are known as a “liquidity pair,” and the ratio between them is kept stable through an AMM algorithm. When a user wants to exchange one asset for another, they must deposit the asset they are selling into the pool. Then they will receive a proportional amount of the asset they buy based on the current ratio, the price changes with every new token deposited and withdrawn from the pool.
These are antiquated models that have failed to meet the demands of the DeFi trading platform community.
A new way of running a DeFi Platform
One novel DeFi exchange worth mentioning is Axo. This soon-to-launch decentralized trading platform offers “programmable swaps,” micro-programs that can be deployed fully on-chain, express any financial behavior, create tokens, and limit execution conditions to authorized parties. Axo can natively support any order type or financial instrument present in traditional or decentralized markets, making it a comprehensive solution for traders.
DEXs are still in their infancy but are developing to become a viable alternative to traditional exchange platforms. Axo will likely be a strong contender in the next generation of DeFi exchange platforms.
In conclusion, DEXs are a valuable addition to the digital asset trading industry. They offer increased security, transparency, and the ability for anyone to participate. While DeFi trading platforms may have lower liquidity and a steeper learning curve compared to centralized exchanges, they are an excellent option for those who prioritize decentralization and control over immediate convenience. It’s essential to do your own research and choose the DEX that best meets your needs and goals, whether you are a beginner or an experienced trader.
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