Why Do Decentralized Exchanges (DEXs) Often Use Automated Market Makers (AMMs) Instead of Traditional Order Books?
AMMs are favored by DEXs because they eliminate the need for traditional market makers and the centralized infrastructure of an order book. They use liquidity pools and mathematical formulas (like x y=k) to determine asset prices and execute trades.
This model is inherently resistant to the "shallow book" problem of traditional order books in low-volume assets, ensuring continuous liquidity. However, this mechanism introduces a different form of cost known as 'impermanent loss' and often higher price impact (slippage) for large trades.
Glossar
Capital Efficiency
Leverage ⎊ Capital efficiency, within cryptocurrency and derivatives, fundamentally represents the maximization of risk-adjusted returns relative to the capital at risk, demanding strategic asset allocation and precise risk parameterization.
Traditional Order Books
Mechanism ⎊ Traditional order books represent a deterministic system for price discovery and trade execution, fundamentally relying on the aggregation of discrete buy and sell orders submitted by market participants.
Traditional Market Makers
Framework ⎊ Traditional Market Makers, within the evolving landscape of cryptocurrency derivatives and financial engineering, operate as essential liquidity providers, distinct from retail participants and algorithmic high-frequency traders.
Automated Market Makers (AMMs)
Architecture ⎊ Automated Market Makers (AMMs) represent a fundamental shift in exchange design, utilizing algorithmic liquidity provision rather than traditional order books.
Decentralized Exchanges
Access ⎊ These platforms offer permissionless entry to cryptocurrency and tokenized asset markets, democratizing capital deployment into novel financial structures.
Mathematical Formulas
Formula ⎊ Mathematical formulas within cryptocurrency, options trading, and financial derivatives represent the quantitative backbone of risk assessment, pricing models, and trading strategy development.