Decentralised Exchanges (DEXs)

What:

In traditional exchanges, market makers (e.g. Optiver) match buyers and sellers. DEXs run on chain.

How (Automated Market Making):

• Smart Contracts take up the role of matching overlapping bids and asks. (Order Books)
• Users deposit pairs of tokens (Token A and Token B) into a smart contract pool.
• A pricing algorithm to model price is used: $x\times y=k$ where:
  • $x$ is the amount of Token A in pool
  • $y$ is the amount of Token B in pool
  • $k$ is a constant value
• Thus, if someone removes $x$ from the pool, $y$‘s value increases. We’ve automated supply and demand !

Risks:

• Front-Running / Sandwich Attacks: Since transactions are broadcast publicly before being mined,

Lending in DEXs

• To borrow, you lock up more value in collateral (e.g. ETH) than the amount you want to borrow (e.g. USDC).
• If the value of your collateral drops below a certain threshold, the smart contract automatically sells it to repay the loan.