How Does a Decentralized Exchange (DEX) Utilize Smart Contracts for Trading Financial Derivatives?
DEXs use smart contracts to create automated market makers (AMMs) and manage the trading logic. These contracts handle order matching, collateral management, and settlement without a central authority.
For derivatives, they define the terms, leverage, and liquidation rules. The smart contract essentially becomes the exchange, holding funds and executing trades trustlessly.
This enables peer-to-peer derivative trading.
Glossar
Smart Contracts
Function ⎊ Smart contracts are self-executing agreements with the terms of the agreement directly written into lines of code, residing on a decentralized ledger.
Impermanent Loss
Exposure ⎊ Impermanent loss, a risk inherent in automated market maker (AMM) protocols and liquidity provision, arises from price divergence between assets deposited and their subsequent value upon withdrawal.
Options
Hedging ⎊ The primary strategic application of these instruments, allowing market participants to offset potential adverse price movements in their underlying crypto holdings.
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.
Decentralized Exchange (DEX)
Platform ⎊ A Decentralized Exchange, or DEX, represents a non-custodial trading platform built upon smart contracts, enabling peer-to-peer exchange of cryptocurrencies and derivatives without requiring a central intermediary to hold user funds.
Automated Market Maker
Architecture ⎊ Automated Market Makers (AMMs) represent a paradigm shift in decentralized exchange, employing mathematical formulas to determine asset prices and facilitate trading without traditional order books.