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).
As you buy an asset from the pool, its amount in the pool decreases and its price rises; as the asset you give in return accumulates, its price falls. This balance is calculated not by a person but by the mathematical formula in the smart contract.
Note: You can also review how a DEX works from within the app. In the DeFi tab of the Markets tab, tapping the What is a DEX? link in the self-custody notice above the list opens a three-step introduction: the definition of a DEX, the liquidity pool, and price impact
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 |
On the DEX for which Paribu provides the interface, the technical steps in the background are not shown to you; you enter the amount, check the summary, and confirm with your passkey. Tokens are always paired with USDT — when buying, the USDT in your Paribu balance is spent; when selling, the proceeds return to your balance as USDT.
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
- A token is sold on the network it was bought on
- Anyone can issue a token on a DEX; for this reason an automatic security scan is shown for every token before you buy
- Transactions made on the blockchain cannot be reversed
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.
Is every token on a DEX safe?
No. Because issuing a token on a DEX is open to everyone, the risk level varies from token to token. Before you buy, the app shows an automatic security scan and marks the token as Safe asset, Caution required, or Risky asset. This scan is automatic; it does not mean that Paribu has reviewed or approved the token.
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 What are slippage (price 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