What Is a Settlement?

In order-book-based decentralized exchanges (DEXs), settlement refers to executing limit or market orders and transferring the associated funds or assets to the user’s crypto wallet.

When a trade order is processed, the funds are held in the wallet until the trade is completed.

Sealing the Deal

To finalize the settlement, users must grant permission for the assets obtained from the trade orders to be added to their crypto wallet.

This ensures that the funds are available for subsequent trade orders.

A smooth and seamless trading experience is essential, especially for users executing multiple orders within a short time frame.

This requires a well-designed user interface (UI) and user experience (UX).

Decentralized Settlement

In contrast to traditional finance (TradFi), where settlements often involve third-party intermediaries, settlements in DEXs and decentralized finance (DeFi) are automated through code and smart contracts.

Various mechanisms, such as automated market makers (AMMs), aggregators, and order books, are used to settle orders.

Users may incur fees during the settlement process, including transaction fees for opening and closing limit or market orders, swap fees for using aggregators, or liquidity provider fees for utilizing an AMM.

However, these fees are typically minimal compared to traditional financial intermediaries and are affordable and fast, particularly on blockchains with high transaction speeds and low gas fees.