Types of Decentralized exchanges

Introduction

Decentralized exchanges (DEXs) are a type of digital currency exchange that allows users to buy and sell cryptocurrencies through direct, peer-to-peer transactions without the need for a central authority. DEXs depend on smart contracts to allow traders to execute orders without an intermediary, and users can trade directly from their wallets by interacting with the smart contracts behind the trading platform. In this blog we will discuss the type of Decentralized exchanges.

Automated market makers 

Automated Market Makers (AMMs) utilize smart contracts to establish liquidity pools, allowing users to trade cryptocurrencies directly without the involvement of a middleman for fund transfer and custody. In AMMs, the exchange rate is determined by a smart contract, granting users immediate access to liquidity, while liquidity providers can generate passive income through trading fees.

Order book

Order book DEXs operate similarly to centralized exchanges, where buyers and sellers place orders that are matched by the exchange. DEXs using order books often have open order information on-chain, while users’ funds remain in their wallets. These exchanges may authorize traders to leverage their positions using funds borrowed from lenders on their platform. However, order book DEXs often suffer from liquidity issues, and traders usually stick to centralized platforms due to extra fees incurred because of what’s paid to transact on-chain. While DEXs with off-chain order books decrease these costs, smart contract-related risks arise because of the requirement to deposit funds in them.

DEX aggregators

DEX aggregators combine liquidity from multiple decentralized exchanges (DEXs) to reduce slippage, optimize swap fees and token prices, and provide traders with the most favorable price quickly. These platforms utilize different protocols to aggregate liquidity from various DEXs, resulting in lower trading fees and optimal token prices. Similar to a decentralized exchange search engine, DEX aggregators eliminate the manual search for the best token price.

Conclusion

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