DEX Glossary — AMM, Slippage, MEV, Approvals, and More Defined

Exchange models

Decentralized exchange (DEX) — A venue where trades settle through smart contracts while users keep custody of their assets. No operator holds funds; nothing moves without a user signature.

Centralized exchange (CEX) — A venue where an operator holds customer funds and matches orders internally. Users trade against a ledger and withdraw to move assets on-chain.

Custody — Who holds the private keys. The property that distinguishes the two models and determines most of their other differences.

Non-custodial — Assets remain under the user's control. Removes counterparty risk; adds key-management risk.

Permissionless listing — Anyone can create a market for any token without approval. The reason nobody has vetted a token on a DEX.

Pricing

Automated market maker (AMM) — A pricing mechanism where a formula computes prices from pool reserves rather than matching quoted orders. Requires no active market makers, only deposits.

Liquidity pool — A contract holding reserves of two or more tokens that trades execute against.

Constant product formula — The common AMM invariant x × y = k: the product of the two reserves must not decrease. Prices along a hyperbola.

Reserves — The token balances held in a pool. Their ratio is the spot price; their size determines price impact.

Spot price — The instantaneous price implied by the reserve ratio, available only for an infinitesimally small trade.

Price impact — Names two different quantities. Execution impact (your average fill versus spot) equals dx / y and is linear in trade size. The pool's spot price move is (1 + dx/y)^2 - 1 and is quadratic. Interfaces rarely say which they show.

Slippage tolerance — The maximum additional adverse movement you will accept between submitting and confirming, caused by other transactions. Distinct from price impact, and on a public mempool it is the budget available to a sandwicher.

Stableswap curve — An AMM curve flattened near a 1:1 ratio, giving high depth for assets expected to hold parity — and changing behaviour sharply when the peg breaks.

Concentrated liquidity — A design letting providers allocate capital to a chosen price range: much greater depth inside it, none outside.

Providing liquidity

Liquidity provider (LP) — Someone who deposits assets into a pool and earns a share of trading fees. Makes no pricing decisions; the formula does.

Impermanent loss — The difference in value between assets held in a pool and the same assets held directly, caused by the formula rebalancing as prices move. Only "impermanent" if prices return to their starting ratio.

Swap fee — A percentage of each trade paid to liquidity providers, commonly around 0.30% though tiers vary.

Market maker — Distinct from an LP: a participant who quotes both sides of an order book continuously, chooses its prices, and manages inventory risk.

Wallet interaction

Approval (allowance) — Permission granted to a contract to move a specific token on your behalf. Persists until revoked. The main drain vector.

Unlimited approval — An allowance with no cap, commonly requested by default — which is why a malicious one does not look unusual.

Permit — A signature-based approval requiring no gas and creating no pending transaction. Carries identical authority to an on-chain approval.

Revoking — Withdrawing a previously granted approval. Not the same as disconnecting a wallet, which removes nothing on-chain.

Connecting — Sharing your public address so a site can read balances and request signatures. Grants no ability to move funds.

Gas — The network fee paid in the chain's native asset to have a transaction included. Charged whether the transaction succeeds or fails.

Revert — A transaction that fails and rolls back. Still costs gas. Often a protection working rather than a fault.

Nonce — A per-address transaction counter. Resubmitting with the same nonce and a higher fee replaces a stuck transaction.

Order types

Market swap — Immediate execution at the curve's price. The default DEX trade.

Signed intent — A signed authorisation stating an acceptable price, executed by a third party when profitable. How DEX "limit orders" generally work — and why nobody is obliged to fill one.

Filler / solver / keeper — The third party that executes signed intents, taking a margin or fee.

TWAP order — A large order split into pieces executed over time, reducing total price impact at the cost of extended exposure and repeated gas.

Risks

MEV (maximal extractable value) — Value extracted by controlling transaction ordering. Possible because pending transactions are public and AMM pricing is deterministic.

Sandwich attack — An MEV strategy: trade immediately before a pending trade to move the price, and immediately after to capture the difference. Bounded by the victim's slippage tolerance.

Mempool — The public queue of pending transactions, where observers see trades before they confirm.

Private relay — A route that submits transactions without exposing them in the public mempool, reducing sandwich exposure.

Honeypot — A token that can be bought but not sold, due to a contract-level restriction invisible in market data.

Impersonator token — A contract deployed using an existing project's name and ticker. Defeated only by checking the contract address.

Rug pull — Operators extracting value and abandoning a project, commonly by removing pool liquidity.

Wallet drainer — Malicious code producing a signature request designed to transfer assets, presented as a routine action.

Stablecoins

Stablecoin — A token designed to hold steady value against a reference asset. A design goal maintained by an issuer or mechanism, not a guarantee.

Peg — The target value. Can and does break.

Depeg — A sustained deviation from the target, during which stableswap pools become one-sided quickly as arbitrage drains the healthy asset.

Fiat-backed / crypto-collateralised / algorithmic — The three backing designs, each with a distinct failure mode. Algorithmic designs have collapsed completely.

DEX Glossary — Decentralized Exchange Terms Defined