Decentralized exchanges (DEXs) are among the most promising blockchain use cases. They open up opportunities to securely buy and sell cryptocurrency without the user having to hand over assets to a third party.
What is Decentralized Exchange (DEX), you might ask?
You probably know the drill with cryptocurrency exchanges. Sign up with your email, come up with a strong password, verify your account, and start trading cryptocurrency on a Website, like Binance. That process is called Centralized Exchange, or CEX.
Although the main idea of crytonomy is to disrupt traditional exchange, remove the impact of a central third party, we are centralizing it in that process.
DEXs are similar to their centralized counterparts in some ways but significantly different in others. The trade happens directly between two users’ wallets, with limited (if any!) input from a third party. In most cases, there’s no depositing or withdrawing crypto.
There are a few different types of decentralized exchanges available to users. The common theme among them is that orders are executed on-chain (with smart contracts) and that users do not sacrifice custody of their funds at any point.
Some work has been done on cross-chain DEXs, but the most popular ones revolve around assets on a single blockchain (such as Ethereum or Binance Chain).
Pros of DEXs
- No KYC
DEXs are permissionless, no one checks your identity. All you need is a cryptocurrency wallet.
- No counterparty risk
The primary appeal of decentralized cryptocurrency exchanges is that they don’t hold customers’ funds. As such, even catastrophic breaches like the 2014 Mt. Gox hack won’t put users’ funds at risk or expose any sensitive personal information.
- Unlisted tokens
Tokens that aren’t listed on centralized exchanges can still be traded freely on DEXs, provided there’s supply and demand.
Cons of DEXs
- Usability
Realistically, DEXs aren’t nearly as user-friendly as traditional exchanges. Centralized platforms offer real-time trades that are unaffected by block times. For newcomers unfamiliar with non-custodial cryptocurrency wallets, CEXs provide a more forgiving experience. If you forget your password, you can simply reset it.
- Trading volumes and liquidity
The volume traded on CEXs still dwarfs that of DEXs. Perhaps more importantly, CEXs tend to have greater liquidity, too.
- Fees
Fees aren’t always higher on DEXs, but they can be, particularly when the network is congested or if you’re using an on-chain order book.
MetaPoo AMM Decentralized Exchange Model
MetaPoo is using the ubiquitous constant product formula: XY = K for its AMM model.
Most DEXs consist of many liquidity pools that represent different trading pairs, like MTP/USDC. Instead of matching buyers and sellers in an orderbook, these liquidity pools act as an automated market maker.
A liquidity pool is a smart contract that holds reserves of two or more tokens and allows anyone to deposit and withdraw funds from them, but only according to very specific rules.
One such rule is the constant product formula x * y = k, where x and y are the reserves of two tokens, A and B. In order to withdraw some amount of token A, one must deposit a proportional amount of token B to maintain the constant k.
Crucially, the AMM does not update this price as other markets move around it, but the players do.
Let say, if the price of MTP on the market goes up above the price on the MTP/USDC pool, buyers just simply swap USDC for MTP and sell them on other sites to make a profit. That action causes the price of MTP in the pool to go up until it meets the price on the market.
If you wish to understand more about this DEX model, you can start with this research article by Paradigm.
In short, Metapoo DEX doesn’t require makers or takers, just users, game theory, and a bit of formulaic poop magic.
One last thing, for every trade, MetaPoo charges a 0.3% transaction fee. The collected fees will be distributed in the following ways:
- 0.2% will be distributed to liquidity providers.
- 0.05% will go to our buyback & burn program
- 0.05% will go to our development fund
For more information, follow us on:
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Whitepaper: https://docs.metapoo.cash
