Exploring the Exciting Use Cases of Decentralized Finance (DeFi) – Part 2
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In the article Exploring the Exciting Use Cases of Decentralized Finance (DeFi) – Part 1, FinFan discussed the first use case of DeFi – that is DeFi of lending and borrowing.
In this article, let’s find out with FinFan the second one - Decentralized Exchanges (DEX).
What is Decentralized Exchange (DEX)?
DEX (Decentralized Exchange) is a decentralized exchange operating on the blockchain platform, allowing users to trade crypto without going through a third-party intermediary. DEX can automatically operate through smart contracts to ensure safety and reliability during the transaction process.
How can you distinguish CEX (Centralized Exchange) and DEX?
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CEX |
DEX |
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KYC |
Requires ID card or passport |
No KYC is required, just a non-custodial wallet |
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Register a trading account |
Yes, register by email |
No account is required, just a non-custodial wallet |
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Lost password or forgot login |
Account recovery can be done by email or identity verification again |
Because the account is not registered by email, the only password the user must know is the wallet's Private Key. If lost or forgotten, no one can help restore it. |
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Unexpected shutdowns, website closures, etc. |
Users are at risk of losing assets if they complete the transaction and store assets in the exchange wallet. |
Users do not lose assets because the assets are in non-custodial wallets controlled by the user. Only when users provide liquidity is there a risk of loss. |
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Number of tokens on the exchange |
The number of tokens is limited, depending on the exchange's decision to list or delist. |
The number of tokens is virtually unlimited as any user can create liquidity and create trading pairs on decentralized exchanges. |
What is Automated Market Making (AMM)?
An automated market maker (AMM) is a type of decentralized exchange (DEX) protocol that relies on a mathematical formula for asset pricing. Instead of using an order book like a traditional exchange, assets are priced according to a pricing algorithm.
Why was this tool (AMM) born?
In today's market, we can name traditional exchanges such as Binance, Huobi, Coinbase, etc. All of them were created by tycoons with large amounts of capital and an extremely large number of trading participants.
In fact, market makers help you get a good price and tight bid-ask spreads on an order book exchange like Binance.
How does AMM work?
AMM operates based on the same protocol as a regular cryptocurrency exchange. However, the currency pairs traded are not two-sided (P2P) like on exchanges but are one-sided transactions with smart contracts (P2C).
Since there is no order book, there are also no order types on AMM. Instead, the price you get for an asset you want to buy, or sell is determined by a formula. It should be noted though that some future AMM designs may counteract this limitation.
So, there's no need for partners, but someone still has to create the market, right? Exactly. Liquidity in smart contracts must still be provided by users, called liquidity providers (LPs).
Some applications of AMM
UNISWAP
Uniswap is an automated market maker (AMM) protocol and decentralized exchange (DEX) built on the Ethereum Blockchain, allowing users to swap any ERC-20 token. Uniswap is currently the most commonly used exchange because of its speed and convenience.
Mooniswap
Mooniswap is an Automated Market Maker (AMM - Automated Market Maker) founded and developed by 1inch, launched on August 10, 2020.
Balancer
Balancer is an automated market maker (AMM) protocol that allows anyone to create liquidity pools for any token at an arbitrary rate (maximum 98/2).
What is Order Book DEX?
Order book DEX has a design quite similar to traditional exchanges. In it, buyers and sellers set prices and quantities on an order book. When these prices and quantities match, the transaction will be executed.
Some applications of Order Book DEX
Tonic
Established in early 2022, Tonic is a decentralized exchange (DEX) platform built on the Near ecosystem. Thanks to the advantages of low transaction fees and high speed of this system, the project wants to bring the features and convenience of centralized exchanges to the Near blockchain and the Aurora layer while still ensuring decentralization. mine.
Brine
Brine is a cross-chain order book DEX offering low trading fees and gas-free transactions. They currently have $750k in TVL which has seen modest growth since launch in summer 2023.