- Decentralized exchanges are still rife with various imperfections including slippage and impermanent loss.
- Chinese crypto project DODO hopes to resolve some of these shortcomings with its novel “Proactive Market Maker” algorithm.
- The platform is nascent, and has yet to prove the test of time like incumbents Uniswap and Curve.
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DODO Exchange, a new arrival to the DEX arena, hopes to grab market share by improving on Uniswap’s imperfections. How?
Through a novel market-making algorithm that improves liquidity and attempts to eliminate impermanent loss.
Getting Started with Decentralized Exchanges
The primary comparison used throughout this guide will be that of Uniswap. Other relevant DEXes include Bancor, Curve, Kyber, and Balancer.
The popular DeFi trading platform offers a base understanding for automated market making (AMMs), the shortfalls of this design, impermanent loss, slippage, and the role of arbitrageurs in a decentralized setting. DODO, and its competitors, is juggling the same constellation of ideas.
AMMs differ from centralized exchanges in the way that they price tokens. Instead of finding a counterparty to buy or sell an asset, and thus establish a price, the counterparty is replaced by a pool of tokens stored on a smart contract. And unlike centralized exchanges, liquidity for these pools is provided by users.
These users are incentivized to provide liquidity by earning returns on the assets they provide. The current trading fee on Uniswap is 0.30%, and this fee is distributed among all liquidity providers (LPs) for helping sustain the platform.
Platforms like Uniswap also differ in the way that they price the assets listed. For the sake of precision, it should be said that there are many types of AMMs. Uniswap…