DEX Related Lingo That You Need to Know — Part 2 : Advance Liquidity
ENEDEX will soon have it’s 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 :
- DEX Agregator
DEX aggregators are technology that effectively allow you to use many DEXs at the same time. This makes it possible to find the most efficient way to swap your assets. Why would you need to look at a bunch of DEXs at the same time?
In short, it’s because aggregators can find the DEX with the best liquidity for your swap. One DEX might have the best liquidity to trade ETH/DOGE, but another is best for USDT/DOGE. Maybe two DEXs have equal liquidity, so the best thing might be to split your order in half, one for each DEX.
Aggregators can find optimal routes and split your order as much as necessary to give you the best overall price. Aggregators focus on the liquidity of the assets you want to swap.
2. TVL
TVL stands for “Total Value Locked.” This is an estimate of the health of a DEX or other DeFi product. It is the US dollar value of all the cryptoassets locked into a platform. High TVL can indicate good liquidity, strong user confidence, high usage, and more.
Being a catchall indicator means there are better individual metrics for all of the mentioned data points, but at a glance TVL can be useful to very roughly compare like products.
3. Impermanent Loss
Impermanent loss, often called IL for short, can happen when you add liquidity to a liquidity pool. Recall that you provide a pair of cryptoassets in a pool, such as ETH/USDT. Impermanent Loss happens when the value between the two cryptoassets changes from the time when you deposited them. The bigger the difference, the more IL. The loss is impermanent because if the difference returns to what it was, you lose nothing.
IL only becomes permanent when you take out your cryptoassets from the pool. Thus, cryptoassets that trade in a close range tend to be the least susceptible to IL. Let’s look at a couple of examples. Let’s say last year you added 1 ETH and 1,500 USDT to a liquidity pool.
Since then, ETH’s value has increased relative to USDT. Now 1 ETH is worth 3,000 USDT. You will have impermanent loss IF you take out your cryptoassets from the pool. But you don’t, and ETH’s price goes back down to 1 ETH == 1,500 USDT. You take out your funds and have no IL!
Stablecoin pairs usually have very little IL because the prices a stable. Providing liquidity in a USDT/USDC pair will have almost no IL, but you will still earn a portion of fees traded.
4.Liquidity Mining
Liquidity mining is an additional reward that a DEX or DeFi protocol uses to attract more liquidity. For example, when you add liquidity to a liquidity pool, on top of paying out a portion of fees generated, a DEX will usually pay you an additional reward.
This reward is typically paid in the protocol’s native asset, though sometimes different cryptoassets are used. Liquidity mining is essentially a way to rent liquidity. In ENEDEX case, this can be achieved by staking LP token later on when we activate such campaign.
5. AMM
AMM stands for ‘automated market maker.’ Most DEXs use an AMM to swap between cryptoassets. AMMs provide an automatic way to trade between two assets. In traditional markets you swap with another trader. In an AMM you swap against a pool of liquidity.
The AMM uses a formula to determine the price of a trade. The price is determined by the ratio of the two cryptoassets in the liquidity pool.
Those are the important lingos that are related to DEX and Liquidity that users need to know. Do we missed something? Do you have any request which lingo that we must cover next? Let us know on ENEDEX community channels.
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