Mega DeFi Edition Part Two šŸ“˜

Decentralized Exchanges, Automated Market Markets, and more

DEFI

Mega DeFi Edition Part Two šŸ“˜

Welcome to day two of the Mega DeFi Edition of the Litepaper. šŸ«‚ 

Todayā€™s focus is on Decentralized Exchanges (DEXs) and the various Automated Market Makers (AMMs) that make DEXs work. Weā€™ll also hit on DEX aggregators.

DEXs
Decentralized Exchanges: Your Direct Ticket to Peer-to-Peer Trading šŸ§‘ā€šŸ”§ 

Letā€™s dive into the world of Decentralized Exchanges (DEXs). Essentially, DEXs let you trade your favorite crypto tokens directly with other folksā€”no middlemen, no long-winded sign-up process, no ā€œwe regret to inform youā€ emails shutting you down. Instead, DEXs run on smart contracts (bits of code on the blockchain) that automatically handle trades once you confirm them.

Hereā€™s the best part: your coins stay in your own wallet until the very last click. Unlike on a centralized exchange (CEX), thereā€™s no big corporate entity babysitting your crypto (and no separate deposit address you have to trust). Youā€™re in charge from start to finish. šŸ‡ 

DEXs
Why Bother With a DEX? šŸ¤” 

  1. You Keep Your Keys
    Ever heard ā€œNot your keys, not your cryptoā€? Thatā€™s basically the DEX mantra. On a DEX, you hold onto your tokens until the second you confirm a trade. No handing them over to a corporate exchange wallet that might get hacked or go bankrupt.

  2. Censorship Resistance
    Since DEXs are built on decentralized networks, itā€™s way harder for one personā€”or one governmentā€”to shut them down or tell them which tokens they can list. If you have an internet connection, youā€™re (mostly) good to go.

  3. No Borders, No Permission Slips
    While local regulations can still vary, the spirit of a DEX is global and open to everyone. Thereā€™s no 20-page sign-up form, no waiting for your account to get ā€œapproved.ā€ Itā€™s like stepping into a global crypto bazaar, free to browse as you please.

  4. Community-Driven Innovation
    Most DEXs are open-source, meaning the code is out there for people to inspect, clone, and improve. This makes it easier for new features to pop upā€”and for the community to keep pushing the envelope.

DEXs
So, How Do DEXs Actually Work? šŸ¤· 

Automated Market Makers (AMMs) šŸ¤– 

Chances are, if youā€™ve used a DEX like Uniswap, SushiSwap, or PancakeSwap, youā€™ve run into an AMM (Automated Market Maker). This is a fancy way of saying there are liquidity pools (imagine big community piggy banks full of two different tokens) that users like you and me can deposit our tokens into. In return for contributing, you earn a slice of the trading fees.

  • Liquidity Pools in a Nutshell:
    Letā€™s say you have ETH and DAI. You throw them both into the ETH-DAI pool. When someone comes along to swap ETH for DAI, they take a bit of your DAI and leave ETH behind. The poolā€™s algorithm recalculates the exchange rate based on whatā€™s left inside. And you get a portion of the trading fees for playing along!

  • Swaps Without Middlemen:
    With AMMs, thereā€™s no ā€œbig exchangeā€ matching your buy or sell order with someone elseā€™s. You just trade directly against that shared pool of tokens. Simple, streamlined, and no need to beg for a specific trading pair to be listed.

Order Book DEXs šŸ“šļø 

Not every DEX uses liquidity pools. Some rely on order booksā€”basically a list of all the buy and sell offers. Traditional centralized exchanges also do this, but on DEXs, it happens on-chain (or partially on-chain). This can be pricier on certain blockchains, but new tech solutions (like layer-2s) are making it more feasible.

DEX Aggregators šŸ‘Æ 

1inch, ParaSwap, and others are known as DEX aggregators. They check a bunch of different DEXs at once to score you the best deal on your trade. Itā€™s like a travel site that compares flights across airlines so you donā€™t have to hunt for the best price on your own.

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