How Do Centralized Exchanges (CEX) and Decentralized Exchanges (DEX) Typically Compare on Spread Size?
CEXs generally have narrower bid-offer spreads than DEXs, especially for high-volume assets. CEXs rely on traditional market makers and high-speed infrastructure to provide deep liquidity.
DEXs, which often use Automated Market Makers (AMMs), can have wider spreads due to the mathematical model, impermanent loss risk, and higher gas/transaction fees impacting the cost of liquidity provision.
Glossar
Constant Product Formula
Formula ⎊ The Constant Product Formula, a cornerstone of Automated Market Makers (AMMs) prevalent in decentralized finance (DeFi), establishes a mathematical relationship ensuring liquidity pool balance.
Decentralized Exchanges
Access ⎊ These platforms offer permissionless entry to cryptocurrency and tokenized asset markets, democratizing capital deployment into novel financial structures.
Centralized Exchanges
Exchange ⎊ Centralized exchanges (CEXs) represent a critical infrastructure within cryptocurrency markets, facilitating order matching and settlement for a diverse range of digital assets, including options and derivatives.
DEX Liquidity
Impermanence ⎊ Decentralized exchange liquidity fundamentally differs from traditional market making due to its reliance on automated market makers (AMMs) and liquidity pools, introducing impermanent loss as a core consideration for liquidity providers.
Automated Market Makers
Architecture ⎊ Automated Market Makers represent a fundamental shift in price discovery, moving away from traditional order book models towards algorithmic execution predicated on mathematical formulas.
Concentrated Liquidity Pools
Allocation ⎊ Concentrated Liquidity Pools represent a capital deployment strategy within automated market makers, shifting from uniform distribution to customized ranges, thereby enhancing capital efficiency.