Track 4 · Markets and DeFi · Module 17

Exchanges, DEXs and AMMs

Centralised and decentralised exchanges, and how a pool sets a price.

Lessons: 7
Reading: 53 min
Quiz: 15 questions
Pass mark: 80%

1Centralised exchangesWhat is a centralised crypto exchange, and what are you trusting when you use one?7 min
2When an exchange fails: FTXWhat happened when the FTX exchange failed, and what does proof of reserves really prove?8 min
3Decentralised exchangesWhat is a decentralised exchange (DEX), and how is it different from a centralised one?7 min
4How a pool sets a priceHow does an automated market maker (AMM) pool set a price?8 min
5Liquidity providers and impermanent lossHow do liquidity providers earn fees, and what is impermanent loss?8 min
6Aggregators, routers and risksWhat do DEX aggregators and routers do, and what are the main risks of swapping on a DEX?8 min
7The Brindlecove case: exchange or pool?How can a company compare selling its tokens on a centralised exchange with selling them into a DEX pool?7 min

The case used in this module

The Brindlecove Labs case (made up)

Brindlecove Labs is a made-up company with a made-up token, BRDL. It keeps its day-to-day cash at Pellowmark Bank, a made-up bank. Its made-up finance lead, Maya, needs to sell 50,000 BRDL for USDC, a dollar stablecoin, to pay costs. She compares two made-up places to do it:

Wyndhollow Exchange, a centralised exchange where Brindlecove already has an account that has passed its identity checks. It runs a BRDL/USDC order book and charges 0.05% on maker orders and 0.10% on taker orders. Withdrawing USDC costs 1 USDC.
Thistlewake Swap, a decentralised exchange that works like Uniswap v2. Its BRDL/USDC pool holds 1,000,000 BRDL and 200,000 USDC and charges 0.30% on every swap, all of it paid to the pool's liquidity providers. Brindlecove itself supplied 10% of the pool.

The lessons come back to Maya each time to ask: who holds the tokens, what does the trade really cost, and what could go wrong? Some quiz questions ask about it. None of this is a suggestion to buy, sell or use anything.

Each module tells its own made-up Brindlecove story, so details can differ from one module to the next.

Key words

Centralised exchange (CEX): A company-run trading platform for buying and selling crypto, for ordinary money or other crypto. It acts as a middleman and often holds customers' assets.¹²
Decentralised exchange (DEX): A trading app built from smart contracts, where people swap tokens directly from their own wallets and prices are set by formulas.¹³
Order book: The list of buy and sell orders waiting to be filled, grouped by price.⁴¹
Maker and taker: A maker order waits on the order book. A taker order fills at once against orders already there. Many exchanges charge the two different fees.⁵⁶
Custody: Holding the keys that control crypto. An exchange that holds the keys to your coins has custody of them.⁷²
Proof of reserves: A voluntary report that a firm's reserve assets covered customer balances at one point in time. Regulators' staff warn it is not an audit and may not cover debts.⁸⁹
Automated market maker (AMM): A smart contract that holds a pool of two tokens and prices trades with a formula instead of matching buyers and sellers.⁴¹⁰
Liquidity pool: The two token reserves held by an AMM's smart contract, which traders swap against.¹¹³
Constant product formula: Uniswap's rule x × y = k: the product of a pool's two reserves must not fall after a trade.⁴¹²
Liquidity provider (LP): Anyone who deposits both tokens of a pair into a pool, in return for a share of the trading fees.¹¹¹³
LP token: A token that records a liquidity provider's share of a pool. It can be handed back for that share of the reserves and fees.³¹¹
Price impact: How far a trade moves a pool's price. The bigger the trade compared with the pool, the bigger the move.⁴¹⁴
Impermanent loss: How much less a liquidity provider's share is worth than simply holding the same tokens, after prices move. It disappears if prices return.¹⁵
Concentrated liquidity: Uniswap v3's design, where each liquidity provider chooses a price range and earns fees only while the price is inside it.¹⁰¹⁶
DEX aggregator: A service that compares prices across many DEXs and can split one swap between them.¹⁴
Token approval: Permission you give a smart contract to move up to a set amount of one of your tokens, or an unlimited amount. Disconnecting your wallet does not cancel it.¹⁷¹⁸

Sources

The crypto ecosystem: key elements and risks (report to the G20). Bank for International Settlements, 11 July 2023.
Get ETH. ethereum.org (read 22 October 2026).
Ethereum glossary (Decentralized exchange; Liquidity tokens). ethereum.org (read 22 October 2026).
How Uniswap Works. Uniswap Developers documentation (read 22 October 2026).
Trading (order types). Coinbase Developer Documentation, Coinbase Exchange (read 22 October 2026).
Fee schedule. Kraken (read 22 October 2026; rechecked 24 October 2026; the fee table sits under the page's “Kraken Pro” heading).
Crypto Asset Custody Basics for Retail Investors – Investor Bulletin. US Securities and Exchange Commission, Office of Investor Education and Assistance (staff views), 12 December 2025.
Exercise Caution with Crypto Asset Securities: Investor Alert. US Securities and Exchange Commission, Office of Investor Education and Advocacy (staff views), 23 March 2023.
Investor Advisory: Exercise Caution With Third-Party Verification/Proof of Reserve Reports. Public Company Accounting Oversight Board, Office of the Investor Advocate (staff views); read via a Wayback Machine copy of 11 August 2026, as the live page showed a bot check, 8 March 2023.
Uniswap v3 Core (whitepaper). Hayden Adams, Noah Zinsmeister, Moody Salem, River Keefer and Dan Robinson, March 2021.
Pools (Uniswap v2). Uniswap Developers documentation (read 22 October 2026).
Uniswap v2 Core (whitepaper). Hayden Adams, Noah Zinsmeister and Dan Robinson, March 2020.
Fees. Uniswap Developers documentation (read 22 October 2026).
What is a DEX aggregator?. 1inch Learn (read 22 October 2026).
Understanding Returns (Uniswap v2). Uniswap Developers documentation (read 22 October 2026; rechecked 24 October 2026). The formula, the table and the term “impermanent loss” sit inside the page's quotation of an outside article it links to on Medium.
Concentrated Liquidity. Uniswap Developers documentation (read 22 October 2026).
How to revoke smart contract access to your crypto funds. ethereum.org (read 22 October 2026).
Universal Router Overview. Uniswap Developers documentation (read 22 October 2026).