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Centralized vs Decentralized Exchanges
- Decentralized exchanges (DEXs) run trades via smart contracts on blockchains without centralized control.
- They avoid risks of theft or failure common in centralized exchanges by trusting code, not people.
Blockchain Limits on Market Making
- The blockchain's slow and costly computation makes traditional order book market making unfeasible.
- This necessitated new market-making mechanisms like automated market makers (AMMs) for DeFi.
AMMs' Constant Product Formula
- Automated Market Makers (AMMs) keep a constant product formula to set prices and facilitate trades automatically.
- This simplifies trading on blockchains without frequent costly price updates.