Crypto Trove

How to Use DEXs In 2024( Complete Beginner's Guide)

Decentralized Exchanges

Decentralized Exchanges (DEXs) are revolutionizing cryptocurrency trading by allowing users to trade directly with each other. They offer advantages like decentralization and lower fees but face challenges such as liquidity.

Also read; Common Pitfalls To Avoid As a Beginner Trader In Crypto

Getting started with DEXs is simple – all you need is a compatible wallet and some cryptocurrency. Overall, DEXs represent an exciting frontier in decentralized finance, offering greater control and security to traders.

Table of Contents

What are Decentralized Exchanges (DEXs)?

Decentralized Exchanges (DEXs) are like digital marketplaces where you can trade cryptocurrencies directly with others, skipping the middleman. They work on blockchain technology, which ensures secure and transparent transactions.

Imagine it like a virtual flea market where you can buy and sell digital assets with other users, all without needing a central authority.

How Do Decentralized Exchanges Work?

Decentralized Exchanges (DEXs) operate using smart contracts, which are like digital agreements that automatically trigger trades once certain criteria are met.

Picture it as a virtual vending machine: you put in your coins, and the machine dispenses your snacks without needing someone to oversee the process.

This setup means users have more control over their funds and are less vulnerable to security breaches. It's like having your own digital vault where only you hold the key.

The Benefits of Using DEXs

- Greater Security and Privacy

 Imagine having a secure vault in your own home for your valuables. That's what DEXs offer in the world of crypto trading. With DEXs, your assets stay in your own wallet, reducing the risk of potential hacks or security breaches. It's like having full control over your digital treasure chest.

- No Need for Intermediaries 

Picture buying directly from the source instead of going through a chain of middlemen. DEXs allow you to trade directly from your wallet, cutting out the need for intermediaries.

This not only saves you money on transaction fees but also removes the risk of your assets being held by someone else. It's like having a direct line to the market without any detours.

- Enhanced User Control 

Imagine being able to make trades instantly, without waiting for approvals or withdrawals. That's the power you get with DEXs. Since there's no involvement of a third party, you have full control over your trades and funds. It's like being the captain of your own ship, navigating the crypto seas with confidence.

- Availability of Tokens 

Think of decentralized exchanges as the early bird catching the worm. They often offer easier access to tokens, especially those freshly minted on their native blockchain. It's like getting first dibs on the hottest new crypto projects before they hit the centralized exchanges. For instance, when I wanted to invest in a promising new token, I found it available on a DEX long before it made its way to traditional exchanges.

- Anonymity 

Ever wish you could make transactions without revealing your identity? With decentralized exchanges, you can do just that. Unlike centralized platforms that require you to go through lengthy KYC processes, DEXs offer anonymity to users.

It's like wearing a digital mask while you trade, ensuring your privacy and security. For me, this added layer of anonymity provides peace of mind knowing that my personal information is not exposed.

- Lower Counterparty Risk 

Have you ever worried about the other party not holding up their end of the bargain in a transaction? That's where decentralized exchanges shine.

By leveraging smart contracts, DEXs eliminate the need for intermediaries, reducing counterparty risk. It's like conducting a transaction with a built-in safety net, giving you confidence that the deal will be executed as agreed. As someone who values trust and reliability in my trades, this lower counterparty risk is a game-changer.

The Challenges of DEXs

- Liquidity Concerns 

One drawback of decentralized exchanges (DEXs) is their potential for lower liquidity compared to centralized counterparts. This means that in some markets, there may not be as many buyers or sellers available, which could result in price slippage during larger trades.

For instance, when I tried to execute a substantial trade on a DEX, I noticed that the order book wasn't as deep as what I typically see on centralized exchanges, leading to a slight deviation in the executed price from what I expected.

- User Interface and Experience

Another challenge with DEXs is their user interface, which can be daunting for beginners. Unlike centralized exchanges that often prioritize user experience and provide intuitive interfaces, DEXs may lack user-friendly features and require some technical know-how to navigate effectively.

When I first ventured into DEX trading, I found myself grappling with unfamiliar charts and trading screens, which made the experience less smooth compared to centralized exchanges.

This has made me to start sharing my experiences with DEXs through Helpfultech just to help beginners easily and smoothly take advantage of the opportunities in DEXs.

- Regulatory and Compliance Issues 

The decentralized nature of DEXs presents regulatory and compliance challenges. Since these exchanges operate outside the realm of traditional financial regulations, they may encounter legal hurdles and compliance issues.

For instance, there's ongoing debate over how DEXs should adhere to Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. As someone who values regulatory compliance and transparency, navigating these regulatory gray areas can be a concern when using DEXs.

Popular Decentralized Exchanges

Here's a rundown of the top 5 decentralized exchanges (DEXs) ranked by their total value locked (TVL). Notably absent from this list is SUN, a DEX exclusive to the Tron network.

It's fascinating to see how these platforms are evolving and gaining traction in the crypto space.

As someone who enjoys using different DEXs, discovering their unique features and offerings is always exciting. Each platform brings its own flavor to the table, catering to various preferences and needs within the decentralized finance (DeFi) community.

 

#1 Uniswap

Uniswap, born in 2018 as a decentralized exchange (DEX) for Ethereum, has grown into a giant in the crypto world. With its user-friendly interface and vast array of trading pairs, mostly ERC-20 tokens, it's no wonder it's the go-to for many traders. As someone who has dabbled in DeFi, exploring Uniswap's offerings has been a journey of discovery.

But Uniswap isn't just limited to Ethereum anymore. Its latest version, V3, has spread its wings across multiple chains, including Arbitrum, Polygon, Avalanche, and even Binance's BNB Smart Chain. This expansion has opened up new opportunities for traders and liquidity providers alike.

What sets Uniswap V3 apart is its flexibility and efficiency. With up to 4,000x capital efficiency compared to previous versions, it offers lower slippage and higher returns for liquidity providers. For someone like me who values maximizing returns while minimizing risk, this is a game-changer.

Moreover, Uniswap's compatibility with various self-custody wallets like, MetaMask, and Coinbase Wallet adds to its accessibility and convenience. It's like having a personalized trading experience tailored to my preferences. 

Uniswap's journey from a humble Ethereum DEX to a multi-chain powerhouse is a testament to the ever-evolving nature of the crypto landscape, and I'm excited to see where it goes next.

#2 Curve Finance

Curve Finance stands out as a decentralized exchange (DEX) catering specifically to stablecoins, offering a reliable platform for traders seeking stability in their transactions. Since its inception in early 2020, Curve has made a significant mark in the crypto space, securing its position as the second-largest DEX by both trading volume and total value locked (TVL), with over $2.3 billion locked in its pools.

As someone who values stability in the volatile world of cryptocurrencies, Curve's focus on stablecoins like DAI, USDC, and others is reassuring. It's fascinating to see how Curve has expanded beyond its Ethereum roots to encompass 13 different chains, providing users with options across various networks.

What sets Curve apart from other DEXs like Uniswap is its unique pool structure. Instead of traditional token pairs, Curve offers pools containing two, three, or even four stablecoins. This setup not only enhances liquidity but also ensures minimal price slippage, making it ideal for executing large trades with ease.

Moreover, Curve has evolved beyond just stablecoins, incorporating assets like Ethereum and Wrapped Bitcoin into its pools. This diversification broadens its appeal and utility within the DeFi ecosystem.

Central to the Curve ecosystem is the CRV token, which empowers users through governance in CurveDAO. Being part of a community-driven platform adds an extra layer of engagement and ownership for users like myself.

In a space where volatility reigns supreme, Curve Finance shines as a beacon of stability, providing a solid foundation for decentralized financial activities. Its emphasis on stablecoins not only mitigates risk but also fosters the growth of innovative DeFi services, making it a cornerstone of the crypto landscape.

#3 PancakeSwap

PancakeSwap emerged onto the DeFi scene in 2020, drawing inspiration from Uniswap but tailored specifically for Binance Smart Chain (BSC), making it a go-to platform for trading BEP-20 tokens. With over $1.6 billion locked in its pools, PancakeSwap has quickly become a significant player in the decentralized exchange space.

PancakeSwap feels like navigating Uniswap's familiar interface, but with a distinct focus on the Binance ecosystem. As someone who appreciates the ease of use and accessibility of decentralized exchanges, PancakeSwap's user-friendly platform makes trading on BSC a breeze.

It's noteworthy that PancakeSwap accounts for a significant portion of the total value locked on BSC, reflecting its popularity and influence within the Binance community. This level of adoption speaks volumes about its reliability and appeal to traders and liquidity providers alike.

One of PancakeSwap's standout features is its native token, CAKE, which offers opportunities for yield farming and participation in the platform's governance. As someone who enjoys exploring different DeFi opportunities, having a native token adds an extra layer of incentive to engage with the platform.

Moreover, PancakeSwap's support for trading and staking non-fungible tokens (NFTs) adds another dimension to its offerings, catering to a diverse range of interests within the crypto community.

PancakeSwap's tailored approach to serving the Binance ecosystem, coupled with its intuitive interface and unique features like CAKE token rewards and NFT trading, makes it a compelling choice for decentralized trading and yield farming experiences.

#4 Balancer

Think of Balancer as a DeFi playground that popped up in 2020, offering a twist on traditional decentralized exchanges like Uniswap. What makes it special? Well, instead of just swapping tokens one for another, Balancer lets you create these cool pools that can hold multiple tokens at once, almost like creating your own mini-index fund.

Imagine you're at a buffet, but instead of just choosing between two dishes, you get to mix and match from a variety of options. That's what Balancer's extended pools feel like. As someone who loves trying different flavors, the idea of curating my own mix of tokens is pretty exciting.

When you contribute your tokens to these pools, you earn rewards in BAL, which is Balancer's own token. It's like getting bonus snacks for sharing your goodies at the buffet.

What's neat is that Balancer isn't limited to just Ethereum – it plays nice with tokens from other chains too. So, whether you're on Ethereum, Polygon, or elsewhere, you can still dive into the Balancer buffet.

With over $700 million worth of crypto assets locked in Balancer's pools, it's clear that people are loving the concept. Knowing that there's such a big appetite for Balancer's offerings gives me confidence in exploring more of what it has to offer.

In a nutshell, Balancer's mix-and-match approach, combined with its tasty rewards and cross-chain compatibility, makes it a fun and enticing spot for anyone looking to spice up their DeFi journey.

#5 Sushiswap

Sushiswap, born in 2020 as a DeFi platform heavily inspired by Uniswap, shares many similarities with its predecessor since its developers initially borrowed the open-source code. However, Sushiswap aimed to empower its users with more decision-making authority, a promise that Uniswap later embraced with community governance.

What sets Sushiswap apart is its remarkable versatility, facilitating token trading across a whopping 19 different chains. This broad reach makes it the most adaptable DEX in terms of chain compatibility. However, despite its flexibility, as of September 2023, Sushiswap's total value locked (TVL) was less than $400 million.

It's like comparing two similar but slightly different dishes at a restaurant. While they may share a common base, each has its own unique flavor and presentation. Similarly, Sushiswap and Uniswap offer similar functionalities but with their own distinct approaches and features.

As someone who enjoys exploring different DeFi platforms, the idea of having more options for trading across multiple chains is intriguing. However, the lower TVL(total value locked) of Sushiswap compared to other platforms is something to consider when deciding where to allocate assets.

In essence, Sushiswap's commitment to user empowerment and broad chain compatibility makes it a noteworthy contender in the DeFi space, even if its TVL might not be as high as some of its counterparts.

There's no shortage of options to explore and uncover.

How to Choose the Best DEX to Trade On

When choosing a decentralized crypto exchange (DEX), it's essential to weigh various factors to ensure a smooth and secure trading experience that aligns with your goals. Here's a rundown of key considerations:

  1. Prioritize Security: Look into the DEX's security measures and history of breaches. Opt for platforms with robust security protocols and reputable smart contract audits to safeguard your assets.

 

  1. Seek High Liquidity: Choose a DEX with ample liquidity to execute trades efficiently, minimizing slippage and ensuring prices closely align with market rates. This enhances your trading experience and reduces risk.

 

  1. Confirm Asset Support: Ensure the DEX supports the cryptocurrencies you intend to trade and is compatible with their respective blockchain networks. Verify if it aligns with your investment portfolio and preferred assets.

 

  1. Evaluate User Interface: Opt for a DEX with a user-friendly interface, especially if you're a beginner. Navigate through the platform to assess its ease of use and clarity of trading instructions.

 

  1. Consider Transaction Fees: Review the fee structure, including trading fees and network transaction fees. Lower fees can significantly impact your trading profitability, especially for high-frequency traders or those handling large volumes.

By carefully considering these factors, you can select a DEX that meets your trading needs while prioritizing security, liquidity, asset support, user experience, and cost-effectiveness.

How to Get Started with DEXs?

- Setting Up a Wallet:

To begin trading on decentralized exchanges (DEXs), the first step is setting up a cryptocurrency wallet to securely store your assets. Personally, I opted for a hardware wallet for its enhanced security features, but there are also software and web wallets available. Each option has its pros and cons, so it's essential to research and choose one that aligns with your preferences and security needs. You can also read Best Decentralized Crypto Wallets for more details.

- Understanding Tokenomics:

Before diving into DEX trading, it's crucial to grasp the concept of tokenomics, including liquidity pools, token pairs, and impermanent loss. When I first started exploring DEXs, I spent time reading up on these fundamental concepts to ensure I had a solid understanding of how they impact trading dynamics. This knowledge proved invaluable as I navigated the intricacies of the decentralized exchange ecosystem.

- Making Your First Trade:

Once you've set up your wallet and familiarized yourself with tokenomics, it's time to make your first trade on a DEX. I began cautiously by initiating a small trade to get a feel for the platform's interface and trading mechanics. Starting with a modest investment allowed me to experiment with different order types and gain confidence in executing trades on the decentralized exchange.

What you need in order to use a DEX

To initiate a crypto-asset swap on a decentralized exchange (DEX), you'll require three essential components:

  1. Digital Wallet: A digital wallet, also known as a crypto wallet or web3 wallet, serves as the storage for cryptocurrencies and digital assets. Opting for a self-custodial wallet, like the Examples Wallet app, ensures that you maintain complete control over your assets. Personally, I prefer self-custodial wallets for their enhanced security and autonomy. 

 

  1. Cryptocurrency: Your wallet must contain cryptocurrency to cover transaction fees and facilitate the swap process. Transaction fees, paid in the blockchain's native currency such as ETH for Ethereum, are essential for executing actions on the blockchain. Additionally, you'll need the cryptocurrency you wish to swap from. If you're new to acquiring cryptocurrency, there are guides available to assist you in purchasing your first digital asset.

 

  1. DEX Site: Selecting a reputable decentralized exchange with sufficient liquidity is crucial. Opt for exchanges that prioritize security and liquidity to ensure a smooth trading experience. Conducting thorough research before choosing a DEX can help you avoid potential pitfalls and safeguard your assets.  You can also read Crypto Tools to Help Identify High-Potential Projects

Key terms In DEXs

Key concepts like liquidity, pools, slippage, exchange paths, and exchange fees is essential for navigating decentralized exchanges (DEXs) effectively

- Liquidity:

Think of liquidity as the lifeblood of a market—it measures how easily assets can be exchanged without significant price shifts. For instance, if you swap 1 ETH for 1500 USDC and the next person swaps 1 ETH for 2000 USDC, it indicates poor liquidity due to dramatic price changes after small transactions.

- Pool (liquidity pool):

Liquidity pools are funds available for trading pairs on DEXs, where liquidity providers earn a share of trading fees. Participating in these pools can offer additional incentives and play a crucial role in maintaining exchange liquidity.

- Slippage:

Slippage refers to price differences during order execution. Setting a slippage tolerance allows buyers and sellers to control how much the final price can deviate from the quoted price. It's important to set an appropriate slippage tolerance to avoid unexpected costs.

- Exchange path:

Sometimes, direct trading between two assets isn't feasible due to liquidity constraints. Exchange paths, or routes, help find the most liquid and cost-effective way to swap assets. For example, if you want to trade ETH for SHIB but there's no direct pair, the DEX may suggest an alternative path like ETH->VERSE->SHIB.

Also read; What are the core concepts of DeFi Business? Beginner’s Guide( Learning the DeFi Slang)

Disclaimer:This is not financial advice. Mentioning coins and tokens is not a recommendation to buy, sell, or participate in the associated network. We would like to encourage you to do your own research and invest at your own risk.

 

- Exchange fee:

A small percentage of each swap is paid to liquidity providers and the exchange as a fee. This fee helps sustain the DEX ecosystem, with a portion allocated to liquidity providers and the rest to the protocol.

These terms will empower you to make informed decisions when trading on DEXs like Verse.

Tips for Safely Using Decentralized Exchanges

Here are some essential steps to take when using decentralized exchanges (DEXs)

- Research and Due Diligence:

Before diving into any DEX, it's crucial to do your homework. Look into the platform's reputation, security features, and user feedback. Personal instances where thorough research saved me from potential scams include checking community forums and reviewing online resources for insights into a DEX's performance and reliability.

- Beware of Scams:

The decentralized nature of DEXs can attract scammers, so it's essential to remain vigilant. Be wary of phishing attempts and double-check the authenticity of the DEX website or platform. Personal experiences encountering phishing scams have taught me to always verify website URLs, ensuring they match the official domain.

- Keeping Your Private Keys Secure: Your private keys are like the keys to your digital assets, so it's crucial to keep them safe. Never share your private keys with anyone, as this could lead to unauthorized access to your funds.

Consider using hardware wallets for added security, as they store your keys offline, away from potential online threats. My own practice of storing private keys securely in a hardware wallet has provided peace of mind and protection against potential cyber threats.

Also read; Good Crypto Research As A Beginner ( Step-By-Step )

How to make money on DEXs

On decentralized exchanges (DEXs), you can make money without necessarily engaging in trading activities.

There are alternative earning opportunities available:

- Providing Liquidity:

Instead of actively trading, you can contribute liquidity to a DEX by depositing your assets into liquidity pools. In return, you earn a share of the trading fees generated by the platform. Personally, I've found providing liquidity to be a passive yet profitable way to participate in the crypto market.

- Bonus Rewards:

Many DEXs offer bonus rewards as incentives for users to engage with the platform. These rewards are often distributed in the form of the DEX's governance token. By participating in various activities such as staking or participating in governance decisions, users can earn additional tokens.

I've personally benefited from bonus rewards programs, which have provided extra income and incentives for active involvement in the DEX ecosystem.

Also read; How to Yield Farm In DeFi ( step-by-step )

Takeaways

Decentralized Exchanges (DEXs) represent a significant advancement in the cryptocurrency trading landscape, offering users enhanced security and control over their assets. As someone deeply interested in crypto, I've been drawn to DEXs due to their decentralized nature, which aligns with the principles of financial sovereignty and independence.

However, it's crucial to recognize that while DEXs offer numerous benefits, they also come with their own set of challenges. For instance, liquidity and user interface issues can sometimes pose hurdles for new users navigating these platforms. 

Therefore, conducting thorough research and remaining vigilant is essential before diving into the world of DEX trading. As an avid enthusiast of decentralized finance, I've learned to approach each DEX with caution, ensuring that I understand its features and potential risks before engaging with it.

You can also read Centralized (CEX) vs Decentralized Exchange(DEX) Usage Statistics