Dex & Liquidity Pool
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In theory, any peer-to-peer swapping could constitute a decentralized trade (see, for instance, Atomic Swaps Explained). But in this article, we’re primarily interested in a platform that emulates the functions of centralized exchanges. The key difference is that their backend exists on a blockchain. No one takes custody of your funds, and you don’t need to trust the exchange to the extent that you do with centralized offerings, if at all.
DEXs are similar to their centralized counterparts in some ways but significantly different in others. Let’s first note that there are a few different types of decentralized exchanges available to users. The common theme among them is that orders are executed on-chain (with smart contracts) and that users do not sacrifice custody of their funds at any point.
Some work has been done on cross-chain DEXs, but the most popular ones revolve around assets on a single blockchain (such as Ethereum or Binance Chain).
A liquidity pool is group of tokens that are locked in a smart contract and used for trading between assets on a decentralized exchange (DEX) like Uniswap.
These pooled tokens are provided by liquidity providers (LPs) who receive an LP token in exchange for providing liquidity.
The Uniswap Protocol AMM sets prices for liquidity pools using the mathematical formula x*y=k.
Prices are determined by the amount of each token in a pool, with x and y representing the two tokens in a liquidity pool.