Blockchain Study Note – DEX

Key Takeaways

  • AMMs have truly been a zero to one innovation, offering a non-custodial, censorship-resistant solution to trading and liquidity pooling.
  • DEX with necessary enhancements will continue to be the building block of DeFi application.
  • With v3 new capability, uniswap still is the front runner.

What is DEX?

A decentralized exchange (better known as a DEX) is a peer-to-peer marketplace where transactions occur directly between crypto traders. DEXs fulfill one of crypto’s core possibilities: fostering financial transactions that aren’t officiated by banks, brokers, payment processors, or any other kind of intermediary.

Key Capability

  • No fiat to crypto, only crypto to crypto
  • Most are open-sourced, enable wider variaty of crypto
  • Anonymous
  • Less counterparty risk

Key Limitation

  • Not user friendy, require own reaserch and heavy lifting
  • Smart contract vurnerability
  • Imperminant loss

Key Players

  1. Capital Efficiency & Customizable AMM Curves: Bancor, DODO, Balancer, Deriswap, Uniswap
  2. On-Chain Market Makers & Orderbooks: Kyber, 0x, Serum, Raydium
  3. DEX Aggregators & Cross-chain Liquidity: 1inch, Matcha, THORchain

Uniswap w3

Concentrated liquidity is clearly the future of AMMs, and V3’s early success speaks to that. Uniswap has increased its DEX market share to 70%+ since its launch.

CEX vs DEX

What is liquidity pool?

A liquidity pool is a crowdsourced pool of cryptocurrencies or tokens locked in a smart contract that is used to facilitate trades between the assets on a decentralized exchange (DEX).

Highlights:

  • When a user supplies a pool with liquidity, the provider is often rewarded with liquidity provider (LP) tokens.
  • Liquidity pools in different protocols may use algorithms that differ slightly. (See formula chart in Key Player Section)
  • Yield farming is making the process smarter

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