Two very different mechanisms are used to trade digital assets, and the difference explains why prices, costs and failure modes vary so much between venues.
An order book matches two sides
A traditional exchange collects buy and sell orders into a book and executes a trade when a bid and an offer meet at a price.
The price is discovered by participants revising their orders, and the exchange's role is matching rather than pricing.
This requires enough participants on both sides at any moment, which is why order book venues concentrate around the most actively traded assets.
An automated market maker prices from a formula
A decentralized exchange holds pools of two assets deposited by liquidity providers, and a formula relating the two balances determines the exchange rate.
A trade changes the balances, which moves the price along the curve, so the venue always quotes a price without needing a counterparty to be present.
The size of the trade relative to the pool determines how far along the curve it travels, which is why large trades receive worse rates than small ones.
Slippage has different causes in each
On an order book, a large order consumes the available depth and fills at progressively worse prices as it exhausts each level.
In a pool, the price moves continuously as the trade executes, so the effect is smooth but present even when no other participant is trading.
Both are the same underlying phenomenon of size against available liquidity, arriving through different mechanics.
Liquidity providers take a position
Depositing assets into a pool earns a share of trading fees, but the composition of the deposit changes as traders exchange one asset for the other.
When the relative prices of the two assets diverge, the provider ends up holding more of the one that fell, an effect commonly described as impermanent loss.
Whether fee income offsets that effect depends on trading volume and price movement, neither of which is known in advance.
Custody is the deeper distinction
Trading on a centralized order book venue usually means the platform holds the assets and settles trades on its own internal ledger.
Pool-based trading executes on-chain from a user-controlled wallet, which removes the platform as custodian and adds network fees and smart contract risk instead.
Neither arrangement eliminates risk. They relocate it, from counterparty and custody on one side to code and execution on the other.