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DEX's And AMM's Fuel DeFi Growthby@samiranmondal
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DEX's And AMM's Fuel DeFi Growth

by Samiran MondalNovember 8th, 2022
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Decentralized finance, also known as DeFi, reached a staggering $6.1b in value locked in its marketplaces in mid-August. Over the past year, it's steadily grown to a current market capitalization of over $80 billion. The proportion of DEXes and Automated Market Makers has increased. DeFi is an online service based on smart contracts that enable people to swap tokens without the intervention of a third party. The system is based on cryptocurrency contracts that allow users to exchange crypto assets without the help of a broker.

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Decentralized finance, also known as DeFi, reached a staggering $6.1b in value locked in its marketplaces in mid-August. By comparison, that total was 1.1b in late May, still nearly 3x higher.


Over the past year, it's steadily grown to a current market capitalization of over $80 billion.


Hedge and VCW funds have been dabbling into the space, influencing the development of decentralized financial infrastructure and DeFi's service offering directly or through the parent firms.


Further advancements in blockchain technology drive the rise of decentralized financial technology (DFT).


At the end of July, about 20% of all decentralized exchanges were held by aggregators and over-the-counter (OTC) trading platforms, so the proportion of DEXes and AMMs has increased.

What Is a DEX?

A decentralized exchange (DEX) is an online service based on smart contracts that enable people to swap tokens without the intervention of a third party. The system is based on cryptocurrency contracts that allow users to exchange crypto assets without the help of a broker.


Any exchange value of a crypto token is based on various factors, including liquidity depth, transaction volume, underlying technology, and other factors.


Additionally, each DEX offers some, but not all, crypto assets their service and supports a minimal number of swaps, so traders are faced with many switches based on their service criteria and are typically only buying or selling a few pairs.


This has led to the proliferation of so-called DEX aggregators, who have started to unify the world of crypto swaps by offering consumers a predefined choice of transitions or to even including unlimited pairs.

What are AMMs?

Automated Market Makers, or AMMs, are different in holding reserves of a pair. The price is selling y for x is not determined by the AMM.


Rather, it is controlled by the algorithm with pre-determined rules. The algorithm constantly adjusts the cost of the two tokens based on the buying and selling activity in the pooled liquidity.


This means that the price of swapping between tokens x and Y might vary significantly based on the choice of liquidity pool and the volume of trades. There are other types of "BridGE" implementations, but AMM service differs from the rest.

How are Automated Market Makers Different?

Automated Market Makers are the first fully transparent layer to come to the crypto market. Computers work with algorithms to determine the rules and honor them. They minimize trader risk by expanding the number of computer-generated trades that can take place in a single second.


In addition to programming otherwise untenable market activity, they ensure a drive and aggressive market behavior that never existed in the industry.


AMM allows anyone to supply funds, called liquidity providers, whether or not they can get paid.


Once you deposit Ether and Tether tokens into the ETH/USDT liquidity pool, you can earn fees and additional funds by offering up contracts, bigger races, launches, or long-shot bets between bitcoin and tethers, in your pool.


Many want to help prepay for a future race or make winning long shots at titanium or Camp David tokens worthwhile, and many become liquidity providers.