What is the ordering method used in dex instead of the order book called?

Question: What is the ordering method used in dex instead of the order book called?

A DEX (decentralized exchange) is a cryptocurrency exchange that operates on a blockchain, without intermediaries or centralized authorities. There are different ways to implement a DEX, but one of the most common methods is using an AMM (Automatic Market Maker) instead of an order book.

An order book is a traditional way of matching buyers and sellers based on their bids and asks. It requires a lot of liquidity and speed to execute trades efficiently. However, an order book also exposes traders to front-running and market manipulation by malicious actors.

An AMM is a smart contract that defines the price of digital assets using a mathematical formula, usually based on the ratio of the assets in a liquidity pool. A liquidity pool is a collection of funds provided by users who earn fees from each trade. An AMM does not need an order book or a matching engine, as anyone can trade with the smart contract at any time.

An AMM has some advantages over an order book, such as:

- It eliminates the need for intermediaries and reduces the risk of censorship or hacking.

- It provides constant liquidity and price discovery, regardless of the market conditions or trading volume.

- It enables low-cost and fast transactions, thanks to the scalability and efficiency of the underlying blockchain.

- It creates new opportunities for passive income and yield farming for liquidity providers.

Some examples of popular DEXs that use AMM are Uniswap, SushiSwap, PancakeSwap, and Curve.

However, an AMM also has some drawbacks, such as:

- It suffers from impermanent loss, which is the difference between holding the assets in a liquidity pool versus holding them in a wallet.

- It can have high slippage, which is the difference between the expected price and the actual price of a trade, especially for large orders or illiquid pairs.

- It can be vulnerable to arbitrage and flash loan attacks, which exploit the price discrepancies between different markets or platforms.

Therefore, some DEXs are exploring alternative methods to implement an order book on a blockchain, such as using sharding, zero-knowledge proofs, or off-chain solutions. Some examples of DEXs that use or plan to use order book are dYdX, Serum, Tonic, and Demex.

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