🔄DEXs
What is a decentralized exchange (DEX)?
A decentralized exchange (DEX) is a platform that allows users to trade cryptocurrencies directly with one another without relying on a central authority. Instead of a company managing transactions, trades happen through smart contracts on the blockchain, making the process automated and trustless.
Liquidity pools
Traditional exchanges typically utilize order books, where buyers and sellers submit bids and await a match. In contrast, DEXs rely on liquidity pools—pools of coins supplied by users—to enable instant trades.
Here’s how it works:
Users deposit coins into a liquidity pool, making them available for trading.
When a trade is executed, coins are swapped directly with the pool, rather than with another trader.
Prices adjust automatically based on supply and demand in the pool.
This system allows trades to be executed at any time, provided there is liquidity in the pool.
Automated Market Makers
An automated market maker (AMM) is the system that powers most decentralized exchanges. Instead of matching buyers and sellers, AMMs use mathematical formulas to determine coin prices based on the ratio of assets in the liquidity pool.
With an AMM, trades do not require a counterparty to be present simultaneously. Prices fluctuate based on liquidity levels and the size of a trade.
Moonshot is NOT an exchange
Moonshot is not an exchange; it is a self-custody blockchain wallet that enables users to interact with DEXs through the Jupiter Aggregator, a smart contract that routes swaps across multiple DEXs to secure better prices. Moonshot submits your transactions to the blockchain, where they interact directly with Jupiter's smart contracts.
Moonshot does not hold user funds or act as a counterparty in any trade.
AMMs vs. other exchange models
Some exchanges, both centralized and decentralized, use order books, where trades are executed when a buyer and seller agree on a price. This system depends on active market participation.
AMMs operate differently by utilizing liquidity pools, where trades interact with a pool of assets rather than a direct counterparty. Prices adjust algorithmically based on supply and demand within the pool.
Larger trades may have a more significant influence on prices, depending on the available liquidity.
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