What Is the Difference between an AMM and an Order Book DEX?
An Automated Market Maker (AMM) DEX uses liquidity pools and a mathematical formula to determine asset prices and execute trades, eliminating the need for traditional buyers and sellers. An order book DEX functions like a traditional exchange, matching buy and sell limit orders from traders, which requires active market makers to provide liquidity.
Glossar
Order Book DEX
Exchange ⎊ An Order Book Decentralized Exchange (DEX) replicates the functionality of traditional order book exchanges within a decentralized framework, primarily utilizing smart contracts on a blockchain.
Liquidity Pools
Provision ⎊ Liquidity Pools are smart contracts holding reserves of two or more assets, facilitating automated trading via an algorithmic pricing mechanism rather than a traditional order book, and are the backbone of decentralized exchange functionality.
Active Market Makers
Market Maker ⎊ The designation for an entity or automated system providing continuous two-sided quotations for a cryptocurrency derivative or underlying asset, essential for maintaining adequate market depth and mitigating adverse selection risk.
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.
Order Book
Depth ⎊ An order book represents a listing of buy and sell orders for a specific cryptocurrency, option contract, or derivative, displaying price and quantity at various levels.