A protocol for exchanging one type of cryptocurrency for another. A decentralized exchange (DeX) differs from a centrally controlled exchange such as Coinbase and Binance. A DeX, such as Uniswap, enables the exchange of crypto tokens using an "automated market maker" (AMM) that interacts with a smart contract rather than another trader. The exchange rate is determined by a formula.
Unlike a centralized exchange that maintains the encryption keys to the coins and transactions, a decentralized exchange requires that users employ their own wallets and store their secret keys in a safe place.
Liquidity Providers and Pools
Anyone can be a "liquidity provider" and deposit funds into an AMM, which creates the "liquidity pool." The provider puts up two types of tokens with equal value and collects fees when an exchange occurs. If the price ratio between the two tokens changes dramatically, the provider might have been better off just holding the tokens for investment. See DeFi
, yield farming
and crypto exchange