It is well-known that decentralized exchanges do not have a central node or server, and work without administrators or any particular management body. All transactions are conducted without intermediaries. However, this does not mean that cryptocurrency traders are the only DEX participants, even though the exchange itself was created specifically for them.
Key participants of DEXes:
Traders – participants who exchange one kind of token for another.
Liquidity providers – cryptocurrency owners ready to deposit their cryptocurrency in liquidity pools, which serve as the base of the entire DeFi system. To put it simply, liquidity providers lend their digital assets to the DEX smart contract in exchange for a commission fee from each transaction with their cryptocurrencies. It is thanks to liquidity pools that the exchange of coins on DEXes takes place instantly.
Arbitrage traders – crypto traders who gain a profit by buying cryptocurrency somewhere else at a lower price and selling it to the liquidity pool. After each transaction is completed, the price balance in the liquidity pool changes, and at this moment the arbitrageurs rush to fill the pool with tokens. This action equalizes asset prices between different trading platforms. Of course, this is a speculative strategy, but it provides quick replenishment of the liquidity pools, without which DEXes could not function efficiently.
IDO (Initial DEX Offering) – a term meaning initial offers of new coins. These offers can take place on a DEX itself or on an outside launchpad platform, unassociated with the exchange, conducting a project audit. After an IDO is completed and new capital is introduced, the new coins pass though listing and become available for free trade on the secondary market. It was due to IDO that the popularity of the DEX grew considerably in 2019–2020 – most startups and investors had exhausted all options for interaction on CEXes through ICO and IEO. Investing in IDO is now one of the most popular strategies on the cryptocurrency market.
This is a short but not exhaustive list of DEX participants. There are also oracles, which provide liquidity pools with information about fair cryptocurrency rates in trading pairs. There are participants who prefer strategies of farming and staking. We’ll talk more about them in due time.