Centralized vs Decentralized Exchanges
Decentralized Exchanges (DEXs) facilitate peer-to-peer trading by using automated smart contracts to execute trades without an intermediary. Most Centralized exchanges (CEXs) allow you to trade on an order book that is maintained by the exchange, where the exchange itself facilitates the trade and charges fees for fulfilling buy and sell orders.
DEXs operate without an intermediary organization for clearing transactions, relying instead on self-executing smart contracts to facilitate trading. This dynamic enables instantaneous trades, at a much lower cost than on centralized crypto exchanges. Additionally when you trade on a DEX, you hold your own keys whereas a centralized exchange may be subject to regulatory and economic policy.
A liquidity pool is a collection of funds locked in a smart contract. Liquidity pools are used to facilitate decentralized trading, lending, and much more.
Liquidity pools are the backbone of many decentralized exchanges and users called 'Liquidity Providers' (LP) add an equal value of two tokens in a pool to create a market. In exchange for providing their funds, they earn trading fees from the trades that happen in their pool, proportional to their share of the total liquidity. As anyone can be a liquidity provider, DEXs have made market making more accessible and as any token pair can be added as liquidity, more trading pairs are possible than in centralized exchanges which curate their own trading pairs (markets).
Types of DEX's used on Dharma
The more traditional types of DEXs employ order books, similar to CEXs while newer DEXs use Liquidity Pools. Dharma has the ability to connect to most DEX's, Lending and Borrowing protocols through WalletConnect, but you may trade in-app using the DEX aggregator 1inch (a decentralized exchange aggregator). As the DEX ecosystem grows, we're supporting more DEX's and aggregators for users to trade on.
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