In the past few years, we have seen the rise of Decentralized Finance (DeFi) and Decentralized Exchanges (DEXs) as the basis for a new financial paradigm in which blockchain technology IOTA will play a central role.
But to get the most out of this financial revolution, you must know how the IOTA project plans to solve the so-called blockchain trilemma, how a DEX works, and can support arbitrage.
IOTA for Decentralized Exchanges
IOTA is a Distributed Ledger Technology (DLT) created to solve the blockchain trilemma. The blockchain trilemma (or scalability trilemma) refers to the challenge of simultaneously achieving scalability, security, and decentralization on a blockchain network.
IOTA promises to solve this problem through a shardless architecture, which allows infinite scalability. Additionally, IOTA uses a novel consensus algorithm called Shimmer to achieve high levels of security and decentralization.
How Decentralized Exchanges Work
DEXs operate on top of decentralized protocols such as IOTA. These exchanges allow users to trade cryptocurrency with no central authority, such as a government body. DEXs are powered by smart contracts, which are self-executing contracts that automatically enforce the terms of a contract once certain conditions are met, facilitating—or making possible—arbitrage investment strategies.
One advantage of using a DEX over a traditional centralized exchange is that it’s much more difficult to hack. That’s because there is no central point of failure on a dex—hackers would need to attack every single node to shut down the network. Additionally, DEXs offer more privacy than centralized exchanges because they don’t require users to go through Know Your Customer (KYC) processes.
AMM Benefits on Decentralized Exchanges
AMM stands for Automated Market Maker. AMMs are algorithms that enable the creation of liquidity pools on decentralized exchanges. These liquidity pools allow users to trade cryptocurrency without an order book. The AMMs algorithms, too, are powered by smart contracts, which match buyers and sellers directly, avoiding the presence of a middleman.
One advantage of using an AMM over a traditional centralized exchange is that AMMs offer lower fees since no middlemen are involved: the smart contract executes trades directly between buyers and sellers. Additionally, AMMs grant more privacy than centralized exchanges because they don’t require users to go through KYC processes.
In conclusion, AMMs and DEXs are two critical aspects of the DeFi revolution and offer several benefits. The Automated Market Makers ensure lower fees. DEXs, compared to traditional centralized exchanges, give increased security and privacy. An example is the FeeLess DEX project developed on top of the IOTA/Shimmer stack.
IOTA, instead, is a DLT (Distributed Ledger Technology) that aims to solve the blockchain trilemma by offering infinite scalability through its shardless architecture. Additionally, IOTA uses a novel consensus algorithm called Shimmer that allows high levels of security and decentralization.