The Alankrit Srivastava Blog

Tag: decentralized exchange

  • Day 19 — How Can You Trade Without an Order Book?

    Watercolor illustration of an automated market maker balancing two token reserves in a liquidity pool

    Trading without an order book

    An automated market maker, or AMM, lets people trade crypto without a traditional order book.

    Instead of matching buyers with sellers, an AMM uses a liquidity pool and a pricing formula.

    This is one reason decentralized exchanges can run directly on blockchains.

    What a liquidity pool is

    A liquidity pool holds two or more tokens inside a smart contract.

    Users called liquidity providers deposit tokens into the pool. In return, they may earn trading fees.

    When someone swaps tokens, they trade against the pool rather than another person.

    How the price changes

    Many basic AMMs use a simple idea often written as x*y=k.

    If a trader removes one token from the pool, the pool charges more of the other token.

    Therefore, large trades can move the price more. This effect is called slippage.

    Why arbitrage matters

    AMM prices can drift away from prices on other markets.

    Arbitrage traders notice the gap. Then they trade until the AMM price comes closer to the wider market.

    The takeaway

    An automated market maker turns a smart contract into a simple trading venue.

    It is open and useful, but traders still need to understand liquidity, slippage, and smart contract risk.

  • Day 18 — What Is DeFi If There Is No Bank Behind It?

    Watercolor illustration of open financial services connected through decentralized smart contracts

    What decentralized finance means

    Decentralized finance, or DeFi, uses smart contracts to build financial tools on public blockchains.

    Traditional finance depends on banks, brokers, and payment companies. Decentralized finance depends on wallets, tokens, contracts, and open networks.

    The goal is not to remove every human. Instead, the goal is to make core rules more open and programmable.

    What DeFi apps can do

    A DeFi app may let users swap tokens, lend assets, borrow against collateral, or supply liquidity.

    These actions happen through smart contracts. The contracts hold assets and follow predefined rules.

    Because the rules are on-chain, users can often inspect how the system works.

    Why wallets matter

    In decentralized finance, a wallet is the user’s account.

    The wallet signs actions and connects to applications. This gives users direct control.

    However, direct control also means mistakes can be expensive.

    The main risks

    DeFi has smart contract risk, market risk, oracle risk, liquidity risk, and user-error risk.

    For example, approving a bad contract can put funds at risk.

    Therefore, open access does not mean automatic safety.

    The takeaway

    Decentralized finance is finance built with blockchain-based rules.

    It can be open and powerful, but it must be used carefully.