What are a DEX (decentralized exchange) and a liquidity pool?
A DEX (Decentralized Exchange) is a DeFi product that lets you swap tokens through an automated system, without an institution in between. Through the self-custody wallet whose interface is provided by Paribu, buying and selling on a DEX happen through a liquidity pool rather than against a seller, and the price is calculated automatically by a mathematical rule.
How does a DEX work?
On a classic exchange, buyers and sellers are matched through an order book. Most DEXs, however, use the AMM (Automated Market Maker) model. Here, instead of a person on the other side, there is a liquidity pool containing two assets. You give the pool one asset and receive the other in return; the price is determined by the balance in the pool.
What is a liquidity pool?
A liquidity pool is a shared resource that contains two assets (for example, a token and a stablecoin). Buying and selling are done from this pool. The larger (more liquid) the pool, the less your transactions affect the price.
You can think of it like a scale: as you add weight to one pan, the other pan rises. A small transaction barely disturbs the scale; a very large transaction visibly changes the balance (the price slips).
How does it differ from the platform?
| Centralized platform | DEX (AMM) | |
|---|---|---|
| Counterparty | Another user (order book) | Liquidity pool (formula) |
| Who sets the price | Supply/demand matching | The balance in the pool |
| Where is the asset? | At the crypto asset custodian the platform works with | In your own wallet |
Info: On the Paribu DEX, the technical steps in the background are hidden from you to make transactions easier; you only enter the amount and confirm.
Important information
- In DEX transactions, the token you buy is held in your own wallet
- The price is calculated automatically based on the balance in the pool
- In large or low-liquidity transactions, slippage may increase
- On the DEX whose interface is provided by Paribu, transactions are same-chain: a token is sold on the network it was bought on
Frequently asked questions
Who is on the other side in a DEX?
Not a person, but a liquidity pool. Your transaction is carried out from this pool, and the price is calculated automatically.
Where is the token I buy on a DEX held?
In your own self-custody wallet. Paribu does not hold or store your token (self-custody).
Will there be a price difference between a DEX and classic Paribu buy/sell?
There may be. On a DEX, the price forms based on the pool balance; slippage may occur, especially in large transactions. For details, you can view the Slippage and price impact article.
Related articles
- How do I buy a token on a DEX? — Steps for buying a token on a DEX and the confirmation process
- How do I sell a token on a DEX? — Selling on a DEX and how long the amount takes to reach your balance
- What are slippage (price slippage) and price impact? — Slippage (price slippage) and price impact
- What is DeFi, and how does it differ from classic Paribu transactions? — The definition of DeFi and how it differs from classic Paribu transactions
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Paribu