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Private Keys and Cold Storage

 What are private keys? 

 A private key is what grants a cryptocurrency user ownership of the funds on a given address. Therefore, the private key is the TICKET that allows an individual to spend cryptos. It is therefore imperative that these keys are kept secure. Private keys give access to wallets. You can think of a wallet as your personal interface to the Bitcoin network, similar to how your online bank account is an interface to the regular monetary system. Wallets contain private keys; secret codes that allow you to spend your coins. 

In reality, it’s not coins that need to be stored and secured, but the private keys that give you access to them. Private keys are what you need to protect if you want to keep your bitcoin safe from hackers, user error, and other possible issues. When you own cryptocurrencies, what you really own is a “private key.” Your “private key” unlocks the right for its owner to spend the associated cryptocurrencies. As it provides access to your cryptocurrencies, it should – as the name suggests – remain private. 

 Oftentimes, cryptocurrency exchanges are the best way to get some coins, but many persons who use these exchanges make a mistake after they’ve gotten their tokens. They keep them on their exchange wallets instead of transferring them to a 

private wallet/hardware wallet. Private keys themselves are almost never handled by the user, instead the user will typically be given a seed phrase that encodes the same information as private keys. 

Some have asked me this question: Do I need to generate a private key? 

Not necessarily. For instance, if you use web wallets like Coinbase or Blockchain.info, they create and manage the private key for you. It is also the same for exchanges. Mobile and desktop wallets usually also generate a private key for you, although they might have the option to create a wallet from your own private key. 

So why generate it anyway? Here are some of my reasons: 

  • You want to make sure that no one knows the key 
  • You also want to learn more about cryptography and random number generation 

Cold Storage 

Cold storage is usually seen as a more secure form of storing cryptos than a traditional wallet. It involves storing bitcoins offline—that is, entirely separate from any Internet access. Keeping bitcoins offline substantially reduces the threat from hackers. There is no need to worry about a hacker gaining digital access to a wallet when the wallet itself is not online. 

The method of cold storage is less convenient than encrypting or taking a backup because it can be harder for users to access their coins. Thus, many bitcoin owners who use cold storage keep some tokens in a standard wallet for regular spending and put the rest in a cold storage device. This reduces the effort of digging out coins from the cold storage every now and then for everyday use. 

Some of the popular forms of cold storage are the Hardware and Paper wallets 

Hardware wallet 

A hardware wallet is a physical electronic device, built for the sole purpose of securing crypto coins. The core innovation is that the hardware wallet must be connected to your computer, phone, or tablet before coins may be spent. 

The two most popular and best Bitcoin and cryptocurrency hardware wallets are: 

  • Ledger Nano X (review) 
  • Trezor T (review) 
  • Trezor 
  • Keepkey 

Hardware wallets are a good choice if you’re serious about security and convenient, reliable Bitcoin & crypto storage. This is because they keep private keys separate from vulnerable, internet-connected devices. 

Your all-important private keys are maintained in a secure offline environment on the hardware wallet, fully protected even should the device be plugged into a malware-infected computer. 

Paper Wallet 

A paper wallet involves printing the public and private keys on paper. This is a way to safeguard against hackers or computer malfunction .In addition, a paper wallet may have a QR code which can be scanned and added to a software wallet to make quick transactions. Since the paper contains all relevant information needed for spending the coins, its safety is crucially important. It is usually a good idea to encrypt as well as duplicate the paper wallet for more safety. 

Other types of cold storage are Sound walletand Deep cold storage. 

Hot Wallet 

We have extensively discussed about offline cold store so far. Let’s now take a quick dive into Online wallet (also called “Hot wallet”

Hot wallets are wallets that run on internet-connected devices like computers, phones, or tablets. This can create vulnerability because these wallets generate the private keys to your coins on these internet-connected devices. While a hot wallet can be very convenient in the way you are able to access and make transactions with your assets quickly, they also lack security. 

Having discussed the security challenges prone to hurt wallets, some of its benefits are that it is 

  • The easiest way to store small amounts of bitcoin and crypto 
  • Convenient; spending and receiving payments is easy and fast 
  • Some hot wallets allow access to funds across multiple devices 

Storing tokens on exchange wallets can be dangerous for a number of reasons. 

Lack of Ownership 

While you can store any coins or tokens you purchase on your exchange wallet, you don’t really own that wallet. Exchange wallets are different from personal wallets in that exchange wallets are ideally just hot wallets for trading. If something happens on the exchange then you don’t have any control over your coins because they aren’t in your custody, they belong to the exchange. 

Unregulated 

Cryptocurrency exchanges are the cross between decentralization and centralization. The whole purpose behind blockchain and cryptocurrency is to promote decentralization. However, exchanges are in fact centralized, which creates a number of issues. Currently, the cryptocurrency world is a bit like the wild west, no one is in charge and there aren’t many rules. 

Hacking Risk 

In addition to the lack of regulation and the inability to guarantee the safety of assets, there is also the threat of an exchange getting hacked. Exchange hacks are relatively common, and due to the lack of regulation, once the coins get lost, that’s it. The owners of the coins can’t get them back from the exchange. While blockchain itself is very secure and essentially unhackable, the centralized nature of exchange makes them vulnerable. 

In conclusion, it is not the smartest thing to do to keep your coins on an exchange. While they may be convenient, it’s much better to get a hardware wallet of your own to store any crypto coins you own. 

If an event were to occur where the exchange is hacked or your account becomes compromised, your funds would be lost. Cryptocurrency exchanges do not provide insurance, making safe storage of cryptocurrencies especially important. As mentioned previously, it is not wise to keep large amounts of cryptocurrency in any hot wallet, especially an exchange account. Instead, it is suggested that you withdraw the majority of funds to your own personal cold wallet as explained above. 

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UNDERSTANDING NON-FUNGIBLE TOKENS (NFTs)

Non-fungible tokens (NFTs) have been a nascent trend in recent times in the crypto-verse, and if you have ever wondered what this crypto buzzword means then you are in the right place.

Fungible and Non-Fungible Items

Before dissecting NFTs, it is salient first, to review what the word ‘Fungible’ means. Fungible suggests any item that is mutually interchangeable, replaceable by another identical item. To illustrate, a thousand naira note is fungible and can be replaced by another thousand naira note, two N500 notes, or five N200 notes since each of these generally hold the same value. Now that we have established what Fungible items are, it is facile to appreciate what the word ‘Non-fungible’ connotes: A unique item that cannot be replaced with something else. This infers that it is an item that does not have a substitute. An example is an original piece of art such as Leonardo Da Vinci’s Salvator Mundi painting.

So what are NFTs?

NFTs are simply a representation of an off-the-blockchain asset, which holds value as a form of cryptocurrency. A cryptocurrency representation of a digital asset. Collectibles like paintings, digital trading cards, pictures, music, video footage, virtual lands, memes, or even tweets – as have been made evident in the past weeks, could be the assets it represents. Literarily anything can have an NFT. An NF token, unlike other cryptocurrencies, holds extra information, with each token having a unique identifier that distinguishes it from every other token.

According to Naval Ravikant – “By assigning a unique token to a thing, its ownership (not the thing itself) becomes programmable, verifiable, divisible, durable, universally addressable, composable, digitally secured, and easy to transfer.”

Other common tokens like Bitcoin and BNB are fungible, in that a unit can be exchanged for another unit. For instance, one satoshi of Bitcoin holds the same value as each of the many other satoshis of Bitcoins that exist. NFTs on the other hand, have idiosyncratic values. NFTs can be anything digital, but a lot of the current enthusiasm is around using the technology to sell digital art. People have realized that a distinct, digital object can be engrossing and even have a notable financial value.

The Ethereum blockchain and NFTs

NFTs are created on a smart contract platform such as the Ethereum ERC-721 protocol; in fact, most NFTs are part of the Ethereum blockchain. This is largely because the Ethereum blockchain allows the storage of extra information that makes each token work differently from other tokens. This means that it allows NFT creators to capture relevant information relating to their digital art while storing it as tokens on the blockchain.

This is not to say that other blockchains cannot implement their versions of NFTs. Indeed, at the end of last year, TRON unveiled their own NFT standard protocol named TRC-721 where NFT blockchain applications can be built on. Other blockchains enabling NFTs are Binance smart chain, EOS, Polkadot, and many more. At the moment though, the Ethereum blockchain houses most of the existing NFTs.

Key Characteristics of NFTs

Some of the characters that typify NFTs are:

  • NFTs are digitally unique, no two NFTs are the same.
  • Every NFT must have an owner and this is of public record and easy for anyone to verify.
  • NFTs are compatible with anything built using Ethereum.
  • Content creators can sell their work anywhere and can access a global market.
  • Creators can retain ownership rights over their work, and claim resale royalties directly.

How to buy or create an NFT

NFTs are bought and traded just like any other cryptocurrency based on Ethereum, only instead of buying some amount of tokens, you buy a single token. To do that, you may begin by installing Metamask, a browser extension that permits interactions with various facets of Ethereum, such as exchanges and decentralized apps. MetaMask is also a virtual wallet for Ethereum and all the tokens created on Ethereum (both fungible and non-fungible).

After installing the extension, you should buy some Ether that you can spend on NFTs. Ensure that you store your MetaMask password and your wallet’s private key somewhere safe. Then, when you visit a website that sells NFTs (such as NBA Top Shot, OpenSea, Mintable) or an exchange where you can trade for them (such as Uniswap), connect your MetaMask wallet to the site and buy your first NFT.

If you are looking instead to create your own NFT, all you need to do is have some Ethereum in your wallet, and then connect your wallet to an NFT marketplace such as Rarible.com, after which you upload your content and mint it into an NFT. Generally, the same marketplaces that enable the sale of NFTs also provide services for the creation of it.

GrimesWarNymph Collection Vol 1

Canadian musician and artist Claire Boucher, also known as Grimes, sold a collection of digital artworks for almost $6m. She announced the auction on Twitter a day before the collection went on sale on the Nifty Gateway platform on February 28th. The collection was branded WarNymph Collection Vol 1 and was created in collaboration with her brother Mac.

Jack Dorseyjust setting up my twttr

Twitter CEO Jack Dorsey, on March 6 sold his first tweet “just setting up my twttr” as an NFT for $2,915,835.47. Crazy right?. Bids were made on the platform – Valuables by Cents which lets people make offers for autographed tweets. A digital certificate was issued to the buyer – Sina Estavi, which was signed and verified by Jack.

Beeple – Everydays: the First 5000 Days

Michael Winkelmann, an American digital artist popularly known as Beeple, sold an NFT of his work for $69 million, named ‘Everydays: the First 5000 Days’ at Christie’s. The sale positions him among the top three most valuable living artists.

Chris Torres – Nyan Cat

Chris Torres proclaimed that he had opened the door to the meme economy when he sold the Nyan Cat meme for 300.00 ETH (about $590,000) in an online auction on the crypto art platform – Foundation.

CryptoKitties – Dragon

The renowned CryptoKitties’ Dragon – a cute electronic cat sold for about 600 ETH, or over $390,000. At the time of sale, the dragon became the most expensive kitty to ever be traded in the history of the blockchain-based game – CryptoKitties.

Possible Opportunities and Risks

Buying an NFT because it interests you, or maybe even to make some quick money is one thing. But investing in NFTs is another. Again, it’s a nascent space, and it can take quite a while when a seller is ready, to find a buyer who’s willing to pay a definite price for a peculiar, one-of-a-kind item.

Also, considering the digital nature of NFTs, it is somewhat convoluted to compare them to valued physical artworks such as paintings. Contrastingly, we are in a season and time where cryptocurrencies are worth a great deal of money. The cryptocurrency market cap is currently in the trillions of dollars and one Bitcoin is worth more than $50,000 at the time of this article, so items from the digital space can surely be very valuable and are capable of maintaining their value over extended periods.

Furthermore, the NFT realm is intricate because each NFT market is disparate from other NFTs, this research has to be peculiar to the singular NFT on your radar. Trading on Ethereum can also be utterly pricey as the network’s recent congestion is causing an upsurge in trading fees.

The most dominant use case of NFTs today is in the digital content space. Content creators can now enjoy the proceeds that hitherto flowed to the platforms when they sell ads to the artists’ followers. Because of the burgeoning of NFTs, creators don’t have to hand ownership of their creation over to the platforms they use to publicize it. Ownership is imbued into the content itself. So that when they sell their content, funds go directly to them.

That being said, NFT’s value is dependent on the prestige and worth that its relating community gives to it. In essence, if everyone says it is worthless, then it is. For digital contents like music, a contract can be infused in the NFT that allows royalty on the song to be shared. Also, NFTs can have a feature that enables a percentage to be paid to the originator every time the NFT is sold or changes hands, making sure that if it becomes a “big hit”, the creator gets some of that reward.

Finally, it is possible to earn money by investing in NFTs, but you will have to do your own research. Also, nothing in this text constitutes investment advice

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ALL YOU NEED TO KNOW ABOUT DEFI

 What is DeFi? 

 DeFi is short for “decentralized finance,” a term used to describe financial applications in cryptocurrency or blockchain built for the disruption of financial intermediaries. It is important to note that they are financial services solutions. They are created on blockchain networks like the Ethereum and Bitcoin blockchain. 

The essence of this category of crypto is to recreate traditional financial instruments in a decentralized environment, outside of the control of governments and private entities or individuals. 

According to Alex Pack (Managing Partner at Dragonfly Capital) – “The goal of DeFi is to reconstruct the banking system for the whole world in this open, permissionless way,” 

DeFi is disparate because it redefines the use case of blockchain from painless value transfer to more convoluted financial use cases. Maker is credited as the first DeFi coin, after which we’ve had many others such as Chainlink, Uniswap, Dai, amongst others. 

To understand DeFi, we must discuss Smart Contracts and the Ethereum blockchain 

Smart contracts help you exchange value of any form in a conflict-free way without the use of a 3rd party. Most “DeFi” applications are built on top of Ethereum, the world’s second-largest cryptocurrency, and the complexity of financial applications that can be created on the ERC-20 blockchain is highlighted by Ethereum creator Vitalik Buterin back in 2013 in the original Ethereum white paper. 

Ethereum is flexible for the creation of smart contracts – which automatically executes transactions if certain conditions are met. Ethereum programming languages liike Solidity, are specially designed for creating and utilizing such smart contracts: rules governing under what conditions money can change hands. 

Importantly, smart contracts not only dictate the rules and penalties around an agreement in the same way that a traditional contract does, it also automatically enforces the rules of the contract, such that the required conditions are either met, or there’s no exchange of value. 

For instance, Flash Loans (an uncollaterized loan option) uses smart contracts to enforce a rule that the money won’t be loaned out unless the borrower pays all outstanding debt back; or that money can only be transferred at a certain temperature level based on figures from Weather.com. Pretty cool right?…haha..I know. 

With smart contracts at the core, dozens of DeFi applications are operating on Ethereum, some of which are explored in this writing. Although Ethereum has scalability challenges, it is expected that Ethereum 2.0, an upgrade to Ethereum’s current network provides lasting solution to the scalabity issues on its network. 

Bitcoin as a DeFi 

Bitcoin and Ethereum are the original DeFi applications. Both are controlled by large networks of computers, not centralized authorities. Ethereum stands apart from Bitcoin because of its ease of use in building other forms of decentralized applications beyond simple transactions. While Bitcoin is rather simpler in its use for payments and other straightforward transactions and a good number of investors use bitcoin as a store-of-value that protects against inflation (just like gold), Ethereum has been instrumental in helping startups crowdfund their business. 

This is not to say that Bitcoin cannot be flexed for complex transactions. For example, companies such as DG Labs – a remittance settlement company, and Suredbits, are working on a Bitcoin DeFi technology called Discreet Log Contracts (DLC) where through preset conditions, wealth can be distributed between two parties without revealing the conditions on the blockchain. 

Why Is DeFi Growing? 

Decentralized finance is becoming popular for several key reasons, which are the same reasons for the growing interest of the public in Bitcoin itself. Banks are not needed and neither is any other 3rd party, you don’t have to trust the other party, there is a 24/7 access, and settlements are comparatively rapid. 

One might then wonder why DeFi are ever needed when Bitcoin already exists. Direct purchases isn’t the only type of financial solution needed. There are other finance needs such as loans, insurance, crowdfunding, derivatives, betting and more, all of which are to be chiefly tackled by various DeFi coins as a result of the limitations birthed by the relative simplicity of the Bitcoin blockchain. As an addition, DeFi is permissionless, censorship resistant, immutable, programmable and offering minimal counterparty risk. 

The total valuation of DeFi coins as of February 2021 is around $35billion which signals the market’s expectation of the future performances of these projects. So, if you are looking to make some cool cash from DeFi, below, we discuss some of the most common use cases for DeFi coins. 

Lending and borrowing 

Lending services appear to be the most adopted DeFi projects with coins like Dharma Lever, Compound and Celsius Network rising as pace setters for decentralized lending services. The term “Yield farming” has suddenly become a crypto lingua which means not only receiving interests in return for lending, but also receiving digital tokens as compensation. Although DeFi lending coins are not there yet, it is expected that the future of DeFi would be such that would have a big impacts on lives of people. The creators’ and users’ dream is that one would be able to buy a house or property on a DeFi platform under a mortgage agreement where repayment is made over a period of years. The deeds of the property would be put up in tokenized form on a blockchain ledger as collateral and, where there is default repayment, the deeds would mechanically shift to the lender. This process will require no lawyers or banks and could positively affect the price of properties since service charges would be excluded. 

Derivatives, Margin Trading, & Prediction Markets 

dYdX and Nuo as of the time of this article can allow users to leverage up to 4x and 3x respectively, thus encouraging shorts, hedging and margin trades. Financial solutions are also springing up for Prediction markets, with Augur (decentralized betting platform with no limits attached) being the most relevant example. One key factor held constant among all these financial solutions, is that they require no third party, bank or clearing house, and usually are entirely permissionless. DeFi for Prediction markets can be used for betting on the outcome of future events like elections, and are able to do this without intermediaries. 

Decentralized exchanges (DEXs) 

Online exchanges such as (Uniswap, Sushiswap, Venus, Ox protocol) provide platforms for users to swap currencies for other currencies; for example, U.S. dollars for bitcoin, ether for DAI. DEXs are the next big step in the cycle of exchanges, which link users directly so they can trade cryptocurrencies with one another without having to trust any intermediary with their money. 

Stable coins 

Although some have argued that stable coins do not typify DeFi because they do not offer any special financial solution other than being the equivalent of a 

particular fiat, it is actually one of the simplest forms of DeFi, as they can be used as a safe haven backed by a more stable currency than that of the user’s environment. Initiating lending contracts and other financial products in a volatile asset such as bitcoin, is impractical, therefore most DeFi contracts integrate stablecoins (such as DAI) at the depth of their functionality. Other more known stablecoins trading today include USDT, USDC, TrueUSD, and Paxos. 

Banking the Unbanked and Saving 

DeFi potentially offers much higher returns to savers than high-street institutions: Compound, for example, which is popular for saving, lending and “Yield farming”, has been offering an annual interest rate of 6.75% for those who save with the Tether stablecoin. Not only do you get interest, you also receive Comp tokens, which is an added attraction. With two-thirds of people without bank accounts in possession of a smartphone, DeFi has the potential and capacity to bank them, such that the local traditional banking institutions are wholly replaced by DeFi projects. 

Potential systematic risks of decentralized finance 

We have discussed extensively about DeFi in all its glory, but this is not all that there is to DeFi. The technology and the social development is not perfect yet and some of the reservations we have are briefly discussed here. 

As of now, it is difficult for newcomers – noobs to separate the good projects from the not-so-good ones. And, there has been quite a number of terrible DeFi projects. 

Even as the popularity of DeFi burgeoned in 2020, a number of DeFi applications, such as meme coin YAM, has crash-landed and become valueless, with its market cap going from $60 million to $0 in 35 minutes. Other DeFi projects, such as Hotdog and Pizza, have suffered the same fate, and many investors lost a lot of money. 

DeFi bugs are regrettably still a main-stay in the space. Smart contracts are very powerful tools, but they can’t be changed after the rules are set into the protocol. Therefore if there was a bug while setting the rules of a smart contract, it becomes a permanent part of the project since rules are irreversible. 

Other risks of DeFi applications could also include hacking. Pack says that “The smart contracts could be hacked. There could be a backdoor that allows someone to steal all of your keys. But you’re trusting in open-source code—over time, many eyes are looking at it.” 

Thus, we urge all who are hoping to make some money by investing in DeFi projects to tread cautiously and DYOR. 

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How to Create Liquidity Pool Token

What you will learn from this article

  • What is a Liquidity Pool
  • Liquidity Pools vs Order books
  • Advantages of Liquidity Pool
  • Liquidity pool exchanges: Uniswap and Bancor
  • Creating a Liquidity pool token

You must have heard about liquidity pools, swaps and liquidity pool tokens and wondered how to contribute to a pool and earn some tokens too. You are definitely in the right place if you’re looking for some answers.

What is a Liquidity pool?

A liquidity pool is a cluster of funds locked in a smart contract for the facilitation of decentralized trading and many more functions. Therefore, Liquidity providers are users that add an equal worth of two tokens (trading pair) in a pool to form a market. Whenever liquidity is channeled into a pool, distinctive tokens known as liquidity tokens are minted and transferred to the liquidity provider’s address. These tokens are a representation of a given liquidity provider’s contribution to a pool. The proportion of the pool’s liquidity provided determines the number of liquidity tokens the provider receives.

Importance of Liquidity Pool to Decentralized Finance

Liquidity pools are one of the fundamental technologies behind the present DeFi ecosystem. They are an important component of the automated market makers (AMM), as well as borrow-lend protocols, synthetic assets, yield farming, decentralized insurance, and gaming. Decentralized exchanges (DEX) such as Uniswap and Bancor use liquidity pools as the venue for ERC 20 token pairings. In exchange for funding an equal value of two tokens in a pool to initiate a market, Liquidity providers earn trading fees from the trades that happen in their pool, which is proportional to their share of the total liquidity, i.e sharing of trading fees is on a pro-rata basis. Uniswap, for example, charges a 0.3% trade fee. Other exchanges that use liquidity pools against the traditional order books are Binance Smart Chain exchanges such as PancakeSwap, BurgerSwap, and BakerySwap containing BEP-20 tokens.

Liquidity pools vs. Order books

To fully examine what Liquidity pools are, there is a need to compare them to the alternative: Order book.

An order book is a list of orders that present offers from buyers and sellers for security. It is a collection of open orders for a particular market.

The system that matches buy orders with sell orders is called the matching engine. A Centralized exchange (CEX) would make use of the Order book. This design is great for facilitating systematic exchange and enables the creation of complex financial markets. Since Decentralized trading involves executing trades on-chain, without a centralized party getting involved by holding the funds, this idea negates the use of order books and necessitates Liquidity pools.

Advantages of liquidity pool

Compared to the traditional order book model, liquidity pools have the following advantages:

Assured liquidity at every price level

Liquidity pool is an automated market maker in the form of a smart contract that automatically matches traders’ buy and sell orders based on predefined parameters. So long as investors have deposited assets into the pool, liquidity is constant and traders do not need to be matched directly with other traders.

Ideal for an environment with low liquidity

When liquidity is low, it becomes challenging for the order book to match orders. They aren’t ideal for an ecosystem where anyone can create their own token and those tokens usually have low liquidity. Whereas, Liquidity pools thrive better in such circumstances.

Automated pricing enables passive market making

Instead of market makers having to constantly adjust their bids and asks on order books as asset prices move, Liquidity providers simply deposit their assets into the pool and the smart contract takes care of the pricing.

Anyone can become a liquidity provider

Anyone can invest in an existing liquidity pool or create a new exchange pair for any token, at any time. When an investor wants to supply liquidity into a pool, they deposit the equivalent value of both assets. For example, Supplying $1000 of liquidity into an ETH/LINK pool requires a deposit of $1000 worth of ETH and $1000 LINK, which is $2000 in total.

In return, the investor receives liquidity pool tokens which represent their proportional share of the pool and allows them to withdraw that share at any time. Liquidity pools require no listing fees, KYC, or other barriers characteristic of centralized exchanges.

Intermediary infrastructure is not required

Unlike order books that require intermediary infrastructure to host order books and match orders, Liquidity pools don’t. This avoids points of control and removes additional layers of complexity.

Lower gas fees

Due to the efficiencies of price calculations and fee distributions within the pool, gas costs are reduced. Decentralized exchanges like Uniswap have a forthright smart contract architecture that reduces gas costs.

With the above being said, it is also worth noting that decentralized exchanges such as Binance DEX work just fine with on-chain order books. Binance DEX is built on Binance Chain, and it’s specifically designed for fast and cheap trading.

Even so, since much of the assets in the crypto space are on Ethereum, you can’t trade them on other networks unless you use some kind of cross-chain bridge that allows data and tokens to flow freely by taking down the walls between chains.

You could think of an order book exchange as peer-to-peer and Liquidity pool and AMM as peer-to-contract.

Liquidity pool exchanges: Uniswap and Bancor

Below, we will be discussing two of the most popular Liquidity pool exchanges briefly; you want to know why?

Uniswap

Uniswap is a decentralized ETH and ERC-20 token exchange that charges a 0.3% trading fee on all its pools. Direct token-token pools are not yet supported, so token-token trades occur in two separate steps: first a sell transaction of the sold token for ETH, followed by an ETH sell transaction to buy the second token.

Bancor

Bancor supports liquidity pools (called Bancor Relays) between their native BNT token and Ethereum or EOS tokens, as well as between Bancor’s stable coin (USDB) and any Ethereum or EOS token. In this article, we focus on Bancor’s liquidity pools on Ethereum. Similar to Uniswap, investors are required to supply equivalent values of each token. Unlike Uniswap, Bancor’s trading fees vary between pools as they are set by the first user to add liquidity to a Bancor Relay. Current fees are in the range of 0.1–0.5%.

To conclude, If you’re providing liquidity to the pool, you are buying a percentage ownership of that pool, depending on what others contribute to the pool. When you decide to redeem your partial ownership you are compensated with the liquidity pool tokens and your compensation is measured by the percentage of the pool that is your contribution. In essence, by adding two tokens of equal value, you’ll get tokens back that represents your share in the pool. You may be able to deposit those tokens into another pool and earn a return.