Modules(by Inorbit)
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Decentralized Exchanges (DEXs)

Learn how AMMs work, explore major DEXs on Arbitrum, and master token swapping and liquidity provision

Beginner • 3-4 hours
8 sections
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Chapter Sections

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AMMs vs Order Books

theory•25 min•Section 1 of 8
In Progress

Automated Market Makers vs Order Book Exchanges

Understanding the fundamental difference between AMMs and traditional order book exchanges is crucial for DeFi trading success.

Traditional Order Book Model

**How Order Books Work:** • Buyers place bids (buy orders) at specific prices • Sellers place asks (sell orders) at specific prices • Trades execute when bid and ask prices match • Market makers provide liquidity by placing orders **Advantages:** • Precise price discovery • No slippage for limit orders • Advanced order types (stop-loss, trailing stops) • Suitable for large trades with minimal price impact **Disadvantages:** • Requires active market makers for liquidity • Can have large bid-ask spreads in illiquid markets • Complex for casual users • Vulnerable to front-running and MEV attacks
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Key Takeaways

  • ✓AMMs provide constant liquidity through mathematical formulas rather than order matching
  • ✓Order books offer precise price discovery but require active market makers
  • ✓AMMs are more accessible for casual users and liquidity providers
  • ✓Each model has trade-offs between efficiency, simplicity, and capital requirements
  • ✓Modern DeFi often combines both models for optimal trading experiences
Estimated time: 25 min
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Chapter Glossary

💡AMM

Automated Market Maker - A protocol that uses mathematical formulas to price assets and enable trading without traditional order books.

💡DEX

Decentralized Exchange - A peer-to-peer marketplace for cryptocurrency trading without centralized control.

💡Liquidity Pool

A collection of tokens locked in a smart contract to facilitate trading and other DeFi operations.

💡Liquidity Provider

A user who deposits tokens into liquidity pools to enable trading and earn fees in return.

💡LP Token

Liquidity Provider Token - A receipt token representing a user's share in a liquidity pool.

💡Impermanent Loss

The temporary loss of funds experienced by liquidity providers due to volatility in trading pairs compared to holding the assets.

💡Slippage

The difference between expected and actual price of a trade, usually due to market movement or low liquidity.