Core Concept

Core Concept: Exchanges & Liquidity

Exchanges exist to convert one currency for another, and are often used as onramps into, or offramps out of, crypto.

With most exchanges, someone can take their fiat currency, such as USD, and exchange that into cryptocurrency, such as Ethereum.

Exchanges need some amount of funds in the variety of currencies they convert, and this is referred to as liquidity. The more liquidity an exchange has in a given currency, the more easily (and cost effectively) you’ll be able to convert to or from it.

dexcexCentralized Exchanges (CEX)

In traditional finance, exchanges have been centralized, and this is largely how the cryptocurrency space grew as well. A centralized exchange relies on an orderbook that is controlled by a business and often these exchanges share similarities to a stock market exchange. A CEX’s orderbook is often limited to the subset of its users and market makers.

Decentralized Exchanges (DEX)

A growing alternative to centralized exchanges is the concept of decentralized exchanges. Instead of any one organization owning and funding the exchange, it relies on blockchain technology as infrastructure to maintain and manage the orderbook activity between buyers and sellers, usually referred to as Automated Market Makers (AMM’s). DEX order books can be connected between applications, with cross-chain liquidity arbitrage opportunities. Funding a decentralized exchange is open to the market, so anyone can participate in, and get rewards from, providing liquidity to a pool.

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