In 2009, Bitcoin was the first cryptocurrency to be launched. Since then, the world of crypto has evolved and come a long way with significant developments in technology, adoption, and security.
DEXs, or decentralized exchanges, are an important part of the cryptocurrency ecosystem. They have decentralized cryptocurrency and made it more accessible. They also promote innovation, which has contributed to the growth and adoption of these digital assets.
If you are new to the world of DEXs, here are ten common terms and slangs that you may find helpful to know:
"Slippage" refers to the price difference between when you initiate a transaction and when the transaction is confirmed on the blockchain. The coin’s price might change between the two points. It occurs due to low liquidity. In other words, you will face slippage if you are trading a large amount of cryptocurrency but there are not enough buyers or sellers at the desired price level to fill the entire order.
Slippage can result in unexpected losses or reduced profits. To minimize the risk of slippage, you can either break up your order into smaller pieces or set a specific price for the trade.
A DeFi or DEX aggregator is a platform that has only one purpose. The purpose is to collect and process data from various exchanges in order to provide users with a unified or merged view of the market.
Aggregators have become quite popular over the last couple of years because they solve a big problem. Different DEXs provide different prices, and it’s hard to find the best deal. An aggregator simplifies the process as it provides real-time price data and market information from various sources in one place.
They provide you with a concise and clear view by combining data from various exchanges, allowing you to swap your token at the best price.
Aggregators also provide market charts, technical analysis, and monitor the news to help users make informed trading decisions.
8. Liquidity Pool
Liquidity pools are a collection of funds locked in a smart contract. They are often referred to as the "backbone" of DEX.
The primary function of liquidity pools is to provide Dex with additional liquidity so that they can function. Users lock their crypto in a smart contract that allows other users to use that stored crypto. This is how liquidity is created. Liquidity providers earn a portion of the transaction fees as an incentive for providing liquidity to the pool.
These pools provide a decentralized and permissionless trading experience and also enable users to earn passive income.
7. Impermanent Loss
Impermanent loss occurs when the price of token changes compared to its pair between the time you deposit it in a liquidity pool and when you decide to withdraw it. It's a very common problem in the world of DeFi, and it leads to an impermanent loss.
The loss is considered "impermanent" because the value of the pool tokens may revert back to their original ratio. When that happens, the liquidity provider's assets become worth the same again.
6. Liquidity Mining
Liquidity mining refers to the process where crypto asset holders lend their assets to a DEX in return for some rewards. In return for providing liquidity to the platform, users receive a portion of the transaction fees or a reward in the form of the platform's native cryptocurrency.
Liquidity mining is a good way to earn passive income. It allows crypto holders to profit by lending their existing assets rather than just having them in their wallets. It is also beneficial to the DeFi platform, as more users mean a higher trading volume and more liquidity.
Staking is the process of locking up cryptocurrency tokens in the form of collateral to help a blockchain network or smart contract become more secure.
It is a key component of proof-of-stake (PoS) blockchain networks, such as Ethereum. Staking can be done through a variety of methods, such as running a validator node, delegating cryptocurrency to a validator, or participating in a staking pool.
In return for staking their cryptocurrency, users can earn crypto rewards.
4. Yield Farming
Yield farming is the process of depositing your cryptocurrency in a DeFi pool and earning rewards or interest from it. Yield farming allows users to generate high investment returns. Liquidity mining and staking are forms of yield farming.
Yield farming lets you maximize returns by taking advantage of the different incentives offered by various DeFi protocols. It can be highly lucrative, provided you understand the risks involved.
AMM stands for Automated Market Makers. They are a type of DEX that uses complex algorithms to automatically execute trades. In an AMM, users deposit crypto into a liquidity pool. The algorithm adjusts the price based on the relative supply and demand of the assets. When a user wants to make a trade, they swap one cryptocurrency for another at the current price determined by the algorithm.
AMMs make trading trustless and decentralized. without the need for intermediaries or order books.
Bridges are one of the core parts of the DeFI ecosystem because they facilitate interoperability between different blockchains to make token transfers easier and more accessible. Bridges are of two kinds. A cross-chain bridge allows for the transfer of assets between two different blockchain networks. Another type of bridge is a data bridge that transfers information between different blockchain networks.
Gas is the fee required to initiate a transaction or execute a contract on the blockchain. The fee incentivizes miners or validators to process the transactions. The fee varies for each token. For example, Bitcoin’s gas is different from Ethereum's.
The amount of gas required for a transaction depends on the complexity of the operation and the network congestion time. Transactions with higher gas prices are usually processed quickly.
Gas fee is an important aspect of crypto transactions, as it ensures the security and operation of the network. However, it can also be a source of frustration for users, as high fees can make transactions more expensive.