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Definition: decentralized exchange


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.

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, cryptocurrency and cryptocurrency exchange.