DEX Related Lingo That You Need to Know — Part 1: Liquidities
ENEDEX will soon have its very own Decentralized Exchange. For the uninitiated, some functionalities and lingo to skillfully use the DEX may sounds unfamiliar. Afraid not, let’s learn together some essential lingos that you or your friends that newly into crypto needs to know :
- Liquidity Pool
Liquidity pool, for those that usually use centralized exchange, is similar to what is called Trading Pair i.e BTC/USDT, ENE/BNB, etc. But what makes it defined as Liquidity Pool is because, on DEX, everyone can create their own Trading Pair. But to do that, the user must create its own Liquidity Pool or add to an existing one with assets that are designated to the pool so that themself or others can swap on that Pool.
The Liquidity Provider must add an equal amount of assets on the liquidity pool to make it work, i.e 1 BTC is perceived to trade 22000 USDT, then the Liquidity Provider must add 1 BTC and 22000 USDT if they wish to add liquidity. The more assets contained within the pool, the more easily two assets can be exchanged without dramatic shifts in the comparative value between the two assets.
Generally, an arbitrage is an act of getting a profit by buying or selling assets on different platforms exploiting price differences between the platforms. But in DEX, arbitrage can be seen as a way for the market to balance the price of an assets across multiple platforms. So let’s say if on ENEDEX DEX the price of BTC/USDT is 20000 USDT for 1 BTC while on other platforms it cost 22000 USDT, then naturally a savvy arbitrage will buy from ENEDEX DEX, bump the price closer to 22000 USDT then sell it on the other platform where it cost more. That way the assets will naturally balance themselves across the market.
3. Liquidity Provision Token (LP Token)
Since DEX is not regulated by a centralized entity so does the ‘bookkeeping’ of who adds liquidity for how much and how many swapping fee shares that the LP gets. That’s what the LP Token is for. It’s a smart contract that’s reflected as a form of token signifying to the LP Provider and everyone else that an LP is owning an X share of liquidity in the Liquidity Pool. This LP Token is also can be sent to other people, staked, and even sold if there’s a Liquidity Pool for it.
4. Swapping Fee and Swapping Fee Reward
To incentivize Liquidity Providers to add liquidity to a pool, the DEX smart contract usually has a swapping fee system. Whereby traders that swap on a pool will have to pay an X amount of swapping fee to the pool, which then this fee will go to Liquidity Providers, split fairly depending on how much liquidity that they provided
Slippage refers to the difference in price when an order is made. When a buyer or seller’s final sale price moves up or down more than the requested price, the price is said to “slip.” On many DEXs, you can specify your slippage tolerance, or how much you are willing to allow the final price to change. The thicker the Liquidity Pool, the lower the slippage of the Pool will be.
Those are the important lingos that are related to DEX and Liquidity that users need to know. Do we miss something? Do you have any requests regarding which lingo we must cover next? Let us know on ENEDEX community channels.
Twitter : https://twitter.com/ENEDEX_HQ
🗣 Telegram : https://t.me/ENEDEX_Official
📖 Medium : https://medium.com/@enedex
Get $ENE today to be a part of sustainable blockchain and energy evolution on :
Analyze price actions on :