How Do Pricing Algorithms Work on Decentralized Exchanges (DEXs)?

Decentralized exchanges (DEXs) allow users to swap cryptocurrencies directly from their wallets, without intermediaries. One of the key features of DEXs is how they set prices using automated systems. Instead of matching buyers and sellers like regular exchanges, DEXs use special pricing formulas called Automated Market Makers (AMMs). Understanding how these systems work can help you exchange crypto more effectively on platforms like <Fswap.

How Do AMMs Work?

Traditional exchanges use an order book, where buyers and sellers set prices. DEXs work differently. They use liquidity pools, where users add tokens to allow others to exchange. The price of tokens in the pool is determined by a simple formula:

X × Y = K

Here, X and Y are the amounts of two different tokens in the pool, and K is a constant value that does not change. The system automatically adjusts token prices depending on how much is swapped.

Example:

Imagine a pool with 100 ETH and 10,000 USDT. The constant K is:

100 × 10,000 = 1,000,000

If someone swaps 10 ETH for USDT, the amount of ETH in the pool goes down, and the price of ETH increases. This is how AMMs keep prices balanced.

What Is Slippage?

Slippage happens when a large swap affects the token price. If there is not enough liquidity in the pool, the price can change a lot during a swap. On some platforms, users can check liquidity pool sizes to estimate potential Slippage.

What Is Impermanent Loss?

People who provide liquidity to pools earn fees from swaps, but they also face a risk called impermanent loss. This happens when the price of their tokens changes compared to simply holding them in a wallet. If they withdraw their tokens when prices have shifted, they might get back less than they would by just keeping the tokens outside the pool.

Example:

If a user provides 1 ETH and 1,000 USDT to a pool when 1 ETH = 1,000 USDT, and later ETH rises to 1,500 USDT, traders will swap tokens in the pool, adjusting the balance. The liquidity provider may end up with fewer ETH and more USDT, sometimes leading to a loss compared to just holding ETH.

How Fswap Helps You

Fswap uses AMM pricing to ensure fair and automatic price calculations. By adding liquidity to pools, users can earn exchange fees while helping others swap tokens. While Fswap does not display liquidity pool sizes, it provides a secure and efficient platform for exchanging cryptocurrencies.

Conclusion

DEX pricing is different from traditional exchanges. By understanding AMMs, Slippage, and impermanent loss, you can swap crypto smarter and use platforms like Fswap more effectively. Always be mindful of potential Slippage and use trusted platforms for secure and easy swaps.