What Is the Role of a “Base Pair” or “Routing Token” in a Decentralized Exchange’s Architecture?

A base pair or routing token, often a major cryptocurrency like ETH or a stablecoin like USDC, acts as a common intermediary for trades between less common tokens. Instead of creating a direct liquidity pool for every possible token pair, which would be capital inefficient, exchanges use a base pair to facilitate trades.

For example, to trade Token A for Token B, a user might first trade Token A for ETH, and then ETH for Token B. This reduces the number of required liquidity pools and concentrates liquidity in a few key pairs.