Swaps are a popular decentralized application (dapp) that allows users to exchange one cryptocurrency for another. These decentralized exchanges, also known as DEX, are not controlled by a central authority such as a bank or government. Some of the most popular swaps sites include Uniswap, Curve, SushiSwap, 1Inch, and Paraswap.
Swaps are a convenient way for users to exchange their cryptocurrency for another type without the need to go through a centralized exchange. This means that users can avoid the fees and limitations that may be imposed by traditional exchanges. In addition, decentralized exchanges offer greater security as they are not controlled by a central authority and users have full control over their private keys.
Swaps work through the use of an Automated Market Maker which allows users to trade two different tokens based on their current prices. This is made possible through the use of a liquidity pool (Lp) which allows users to provide liquidity to the exchange by combining two tokens together. These liquidity providers are then rewarded with fees for every trade that is made through the exchange. However, they also run the risk of experiencing impermanent loss, which is the loss that occurs when there is a price difference between the two tokens provided by the liquidity provider.
For example, if a liquidity provider puts up token A and token B, with token A being worth $10 and token B being worth $1, and the liquidity provider puts 1 token A and 10 token B for a total liquidity of $20, if the price of token B increases while the price of token A does not, the liquidity provider will have more token A and less token B, but with the same amount of liquidity provided. In this case, the liquidity provider has experienced impermanent loss because if they had not provided liquidity and simply held the two tokens separately, they would have made more money than by providing liquidity.
Usually, every swap dapps, like Uniswap, Curve, SushiSwap have a Lp section where users can provide liquidity to the protocol in exchange for the governance token of the protocol and the fees generated from swaps. The AMM and Lp functions, which were among the first to be introduced in the Ethereum ecosystem, are revolutionary because they replace the centralized exchange model with code, eliminating the need for a centralized company to facilitate trades.
In addition to swap sites, there are also swap aggregators which compare the prices and liquidity of different exchanges and provide users with the best exchange rates. Some of the best swap aggregators include Paraswap and 1inch.
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