How Do Decentralized Exchanges (DEXs) Serve as On-Chain Price Oracles?
Many DEXs, particularly those using Automated Market Makers (AMMs), inherently track the price of assets based on the ratio of tokens in their liquidity pools. Smart contracts can read this on-chain data directly, using the pool ratio as a real-time price feed.
While convenient, this method is vulnerable to manipulation if the pool has low liquidity or if the price is easily skewed by large trades or flash loans.
Glossar
Decentralized Exchanges
Access ⎊ These platforms offer permissionless entry to cryptocurrency and tokenized asset markets, democratizing capital deployment into novel financial structures.
Constant Product Formula
Formula ⎊ The Constant Product Formula, a cornerstone of Automated Market Makers (AMMs) like Uniswap, dictates the relationship between the reserves of two tokens within a liquidity pool.
Automated Market Makers
SystemArchitecture ⎊ Automated Market Makers represent decentralized trading protocols that utilize algorithmic functions, rather than traditional bid-ask order books, to facilitate peer-to-contract asset exchange.
Concentrated Liquidity
Allocation ⎊ ⎊ Concentrated liquidity represents a departure from traditional automated market maker models by enabling liquidity providers to specify precise price ranges where their capital will be deployed, fundamentally altering capital efficiency.