OKX Blockchain 60 Lectures | DeFi Episode 4: How Do DEXs Work in DeFi?
Hello everyone, this is Xiao K. Today we will be discussing: "How Do DEXs Work in DeFi"?
Hello everyone, this is Xiao K. Today we will be discussing: "How Do DEXs Work in DeFi"?
In the previous lesson, we covered aggregators, which are an alternative to funds in the DeFi world. In this lesson, we will share another important area of DeFi — DEX. DEX stands for Decentralized Exchange, which refers to a decentralized trading venue.
In the previous lesson, we covered aggregators, which are an alternative to funds in the DeFi world. In this lesson, we will share another important area of DeFi — DEX. DEX stands for Decentralized Exchange, which refers to a decentralized trading venue.
As we all know, in traditional finance, if you want to buy stocks of companies like Alibaba or Tencent, you need to go to a securities exchange in the United States. Similarly, if you want to purchase digital assets like Bitcoin or Ethereum, you need to go to a cryptocurrency exchange. DEX is essentially the counterpart of cryptocurrency exchanges within the DeFi ecosystem. By using smart contracts and on-chain trading to eliminate the need for third-party institutions, DEXs perform the function of order matching, thereby ensuring fairness and transparency in trading.
As we all know, in traditional finance, if you want to buy stocks of companies like Alibaba or Tencent, you need to go to a securities exchange in the United States. Similarly, if you want to purchase digital assets like Bitcoin or Ethereum, you need to go to a cryptocurrency exchange. DEX is essentially the counterpart of cryptocurrency exchanges within the DeFi ecosystem. By using smart contracts and on-chain trading to eliminate the need for third-party institutions, DEXs perform the function of order matching, thereby ensuring fairness and transparency in trading.
Below, we will specifically discuss the differences between traditional cryptocurrency exchanges and DEXs:
Below, we will specifically discuss the differences between traditional cryptocurrency exchanges and DEXs:
In traditional cryptocurrency markets, when users trade with each other, they place various buy and sell orders. The exchange provides a dedicated platform operated by a third-party team, matching buy and sell orders through the platform to help users complete their trades. Throughout this entire process, users' assets are held in the exchange and managed by the exchange on their behalf.
In traditional cryptocurrency markets, when users trade with each other, they place various buy and sell orders. The exchange provides a dedicated platform operated by a third-party team, matching buy and sell orders through the platform to help users complete their trades. Throughout this entire process, users' assets are held in the exchange and managed by the exchange on their behalf.
However, over time, this gave rise to a new problem — people felt that exchanges were like a black box, with opaque data and no way to verify whether they actually held sufficient reserve funds. As a result, someone proposed using pre-programmed smart contracts to replace the original third-party trading platform and perform the order-matching function. This is how decentralized exchanges came into existence.
However, over time, this gave rise to a new problem — people felt that exchanges were like a black box, with opaque data and no way to verify whether they actually held sufficient reserve funds. As a result, someone proposed using pre-programmed smart contracts to replace the original third-party trading platform and perform the order-matching function. This is how decentralized exchanges came into existence.
However, traditional exchanges, in order to ensure stable and smooth trading, will specifically seek professional market-making teams to ensure order depth for buyers and sellers. But decentralized exchanges, due to the absence of third-party market makers, result in large price spreads between user trades. For example, something with a market price of 100 yuan, due to insufficient order depth and no one selling at the 100 price level, must have the price raised to 200 yuan before a transaction can be executed. This causes users to lose money before they even trade.
To solve this problem, decentralized exchanges developed a special mechanism — the liquidity pool. This pool functions as a reserve fund for decentralized exchanges, where users first deposit their funds, and all subsequent trades are conducted through this pool for digital asset swaps. The pool provides order book depth, thereby ensuring trading stability.
Additionally, the funds in this pool can be provided by anyone without restrictions and can be withdrawn at any time. Decentralized exchanges also reward liquidity providers by returning a certain percentage of trading fees to them, encouraging everyone to contribute liquidity. Therefore, compared to traditional centralized exchanges, decentralized exchanges are essentially powered by everyone "making the market" together, collectively maintaining trading stability and depth.
Overall, both centralized and decentralized exchanges have their own respective advantages. Decentralized exchanges offer greater data transparency and fairer rules, while centralized exchanges provide faster efficiency and a better user experience. It is believed that for a long time to come, the two will complement each other, and through competition and cooperation, deliver a better financial investment experience for everyone.
Special thanks to Shentu Qingchun for his assistance and guidance on this episode.
Weibo: @申屠青春
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