How Does a Decentralized Exchange (DEX) Differ from a Centralized Exchange (CEX) in Terms of Liquidity Provision?
A CEX uses an order book model where liquidity is provided by buyers and sellers placing limit orders. A DEX, typically using an Automated Market Maker (AMM) model, relies on liquidity pools funded by users (Liquidity Providers or LPs).
LPs deposit assets into a smart contract to facilitate trading. This pool-based system is what a rug pull exploits, as the capital is locked in a contract, not held by a central authority.
Glossar
Automated Market Maker
Architecture ⎊ Automated Market Makers (AMMs) represent a paradigm shift in decentralized exchange (DEX) design, moving away from traditional order book models to a constant function market mechanism.
Centralized Exchange
Intermediary ⎊ This refers to a regulated or semi-regulated entity that acts as a trusted third party, facilitating the custody of client assets and the matching of buy and sell orders for cryptocurrency and associated derivatives on a centralized order book.
Market Maker
Agency ⎊ A market maker in cryptocurrency derivatives functions as a principal, providing liquidity by simultaneously posting bid and ask prices for contracts, notably perpetual swaps and options.
Decentralized Exchange (DEX)
Platform ⎊ A Decentralized Exchange (DEX) is a cryptocurrency trading platform that operates without a central intermediary, allowing users to trade digital assets directly from their non-custodial wallets.