Exchanges, DEXs and AMMs: key words
Read the word, say the meaning out loud, then open the card.
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. Source
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. Source
Order book
The list of buy and sell orders waiting to be filled, grouped by price. Source
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. Source
Custody
Holding the keys that control crypto. An exchange that holds the keys to your coins has custody of them. Source
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. Source
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. Source
Liquidity pool
The two token reserves held by an AMM's smart contract, which traders swap against. Source
Constant product formula
Uniswap's rule x × y = k: the product of a pool's two reserves must not fall after a trade. Source
Liquidity provider (LP)
Anyone who deposits both tokens of a pair into a pool, in return for a share of the trading fees. Source
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. Source
Price impact
How far a trade moves a pool's price. The bigger the trade compared with the pool, the bigger the move. Source
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. Source
Concentrated liquidity
Uniswap v3's design, where each liquidity provider chooses a price range and earns fees only while the price is inside it. Source
DEX aggregator
A service that compares prices across many DEXs and can split one swap between them. Source
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. Source