When talking about decentralized exchanges, you first need to understand the core difference between them and centralized exchanges.

**Order Book vs Automated Market Maker**

The major exchanges and mainstream platforms we usually use are primarily order book models—if you want to buy coins, you need to find someone willing to sell; if you want to sell coins, you wait for someone to take the other side. The exchange acts as a matchmaker, connecting buyers and sellers according to their needs. It’s like a traditional market, where sellers quote prices, buyers negotiate, and transactions are finalized.

Decentralized exchanges operate on a different logic called Automated Market Makers, or AMM. There are no counterparties of buyers and sellers; instead, there are “liquidity pools.” Think of it as a vending machine—you put in coins and, according to fixed rules, you can exchange for another coin, all without third-party matching.

**Core Formula of Liquidity Pools**

Each trading pair has its own liquidity pool. The pool contains two assets (for example, ETH and USDT), which are deposited by liquidity providers. When users trade, they interact directly with this pool—if you want to buy ETH, you exchange from the pool, and at the same time, you need to deposit an equivalent value of USDT into the pool.

AMM is supported by a famous formula:

**x × y = k**

Here, x is the amount of the first token in the pool, y is the amount of the second token, and k is a constant. No matter how you trade, k remains unchanged. This formula determines the exchange price—buy more, and the unit price gets higher; sell more, and the unit price gets lower. That’s why large orders tend to cause slippage.