How Do DEXs Work? AMM vs Order Book vs Aggregator Explained
Decentralized Exchanges (DEXs) are a cornerstone of the DeFi movement. They allow users to trade cryptocurrencies without a centralized authority, giving you full ownership over your funds. But how exactly do they work—and what are the different types?
In this post, we’ll break down the three core mechanisms behind DEXs:
🔹 AMM (Automated Market Maker)
🔹 Order Book (On-chain & Off-chain)
🔹 DEX Aggregators
Let’s dive in.
1. Automated Market Makers (AMM)
Most modern DEXs use an AMM model. You’ve probably heard of Uniswap, PancakeSwap, or SushiSwap—these are all AMM-based DEXs.
🔧 How It Works:
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Liquidity Pools: Instead of matching buyers and sellers, AMMs use liquidity pools where users deposit pairs of tokens (e.g. ETH/USDT).
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Liquidity Providers (LPs): These users earn a portion of the trading fees in return for providing liquidity.
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Pricing Formula: AMMs use a mathematical formula
—most commonly x * y = k—to adjust token prices automatically as trades occur.
Pros:
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Always available for trading (no need to wait for a counterparty)
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Fully decentralized—no middlemen
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Anyone can provide liquidity and earn fees
Cons:
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Impermanent Loss: LPs may lose value if token prices fluctuate drastically
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Slippage: Large trades can impact the pool balance and result in worse execution prices
2. Order Book-Based DEXs
Some DEXs borrow from traditional exchanges and use order books to match buyers and sellers. There are two main types:
a) On-Chain Order Book
All buy/sell orders are recorded directly on the blockchain.
Pros: Fully transparent and censorship-resistant
Cons: Slower and costly due to gas fees (not suitable for high-frequency trading)
Example: Early Ethereum-based DEXs tried this approach, but it became impractical.
b) Off-Chain Order Book
Orders are recorded and matched off-chain, and only finalized on-chain.
Pros: Fast, low-cost, good for active trading
Cons: Somewhat centralized—relies on off-chain infrastructure (not fully censorship-resistant)
Examples:
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dYdX (off-chain order book in early versions, transitioning to on-chain in V4)
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Serum (Solana-based order book DEX)
3. DEX Aggregators
DEX Aggregators don’t have their own liquidity. Instead, they search across multiple DEXs to find the best price for your trade.
Popular Aggregators: 1inch, Matcha
How It Works:
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You submit a trade (e.g. swap A for B)
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The aggregator scans various DEXs and finds the optimal route—possibly splitting your trade across multiple platforms to get the best deal
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It helps reduce slippage and improves pricing
Pros:
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Best execution price across the entire DeFi market
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Saves time—you don’t have to compare DEXs manually
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Better access to low-liquidity tokens
Final Thoughts
The majority of today’s DEXs use AMMs because they’re simple, efficient, and fully decentralized.
However, order book models still exist and are evolving—particularly for advanced users and high-volume traders.
Meanwhile, aggregators improve the user experience by offering the best prices with minimal hassle.