The hip new technology known as DeFi (Decentralized Finance) has been the talk of the crypto towns as of late. With the world being full of shady banks and financial companies that restrict trading practices *turns and stares at Robinhood* there’s a new calling for financial services that better serve the public.
Enter DeFi, an innovative measure to give power back to the people when dealing with financial matters. It’s important to note that DeFi is in fact a pretty new tech and it’s evolving every single day. New ideas for this technology are just starting to bud so now is a great time to become familiar with it.
DeFi exchanges, or DEXs, play a major role in helping traders invest into DeFi tokens and projects. They ultimately help to fuel the DeFi world, so knowing how to utilize them is important to understand.
This article will take you through the following related topics on DeFi exchanges, along with a short tutorial on exchanging Ether (ETH) for the DAI stablecoin.
What is DeFi?
DeFi may sound like a sort of alien spacecraft, but it’s the general name given to decentralized financial platforms and services. Decentralized finance is a special type of structure that is not connected to any central authority.
This is where the hype and obsession of DeFi is beginning, there are no big banking bullies or Wall Street cronies that interfere with your money. You’re given the ability to govern yourself and conduct your own peer-to-peer transactions.
But wait! This sounds super similar to the concept of cryptocurrency systems such as Bitcoin and Ethereum. What differentiates DeFi from crypto is it’s decentralization of decision-making authorities. Crypto ideals lean more towards decentralizing currency values and maintaining a peer-to-peer payment system.
Since financial instruments are not limited to sending and receiving money, more advanced financial functions are encompassed by DeFi. Borrowing, lending, decentralized crypto exchanges, insurance, marketplaces, and more are what makes DeFi so special.
What is a DeFi exchange (DEX)?
A decentralized exchange (DEX) is the hub for investments and transactions for cryptocurrencies that are fully open source. Nobody controls a DEX, buyers and peer-to-peer trading applications deal with each other on a one-to-one basis.
Think of a DeFi platform as a bazaar for crypto with several buyers approaching sellers. Both parties are looking to exchange cryptocurrencies for the best rate possible.
The best advantage to using DeFi is that you do not need to entrust your money to a trading company, third party, or that sketchy dude around the corner (seriously, don’t trust that guy). You are the sole owner of the assets on your account and you are responsible for conducting your own trades.
When dealing with CEXs a user gives the exchange their currency and trusts they will give it back. Since crypto isn’t insured or recoverable, CEXs are a risk because hacks and massive currency losses do occur. DeFi provides users the full ability to maintain and monitor their own currency.
What are the advantages of using DeFi?
The biggest advantage of DeFi is being non-custodial, which means you own all your coins and tokens.
DeFi exchanges do not have any intermediates and all executed transactions work autonomously to provide trading services to its users.
Thanks to decentralized finance, users can receive their crypto in a fraction of the time and with lower commission fees when compared to CEXs.
DeFi holds the promise of allowing anyone with an internet connection to access monetary services, simple or complex financial products, investment instruments, and trading opportunities.
Users are also given greater anonymity. With a growing number of crypto exchanges requiring KYC verification, DeFi helps users maintain privacy by rarely requiring any sort of similar process.
What are some drawbacks of using DeFi?
While DeFi looks to “stick it to the man” in the finance world, it does possess some drawbacks. Since it’s a rather new tech, there are still various bugs to squash and a user base to grow.
Considering DeFi is such a new concept, not many people are using, or even have heard of this technology. This issue is likely to be solved with time as word continues to spread and more platforms become available and more user friendly to access.
Another major issue in DeFi is the abundance of scams and frauds. A few projects have committed fraudulent activities that involve what is known as a “rugpull”. A rugpull is the withdrawal of ETHs that are locked by having a gap in the code to another wallet by project founders. Thus, the security of the funds is at risk.
To be clear this mostly happens with liquidity pools. Decentralized exchanges are a direct swap of one currency for another without intermediary and built on blockchain so are safe from this particular type of risk.
What are the best DEXs to use?
At this time, there are several major DEXs available for usage that have an established name. When reading up on other DEX options always be sure to do your due diligence and be on the lookout for potential scams.
Below is a short list of some of the most popular DEXs to date. To see a more extensive list you can check out CoinMarketCap’s DEX list which also contains information on volume, pairs, and prices.
Most popular DEXs
Note: Although there are a lot of DEXs out there that you can use, you should consider gas fees, coin availability, volume, swap rates, and slippage when selecting the exchange that is right for you.
What is DEX swapping?
DEX swapping is the process of converting a coin in your cryptocurrency wallet to another coin you want. If you’re familiar with trading Pokemon cards then this is sort of the same thing…except it’s with crypto.
Swapping is quite similar to placing an order to exchange a specific crypto pair. The difference is that the entire process is decentralized so there are no middlemen involved.
When conducting a swap, you’ll head to a decentralised exchange where you can view various swapping options. You’ll have to connect your ETH wallet to the platform and then enter in the amount of the crypto you’re looking to swap for the available crypto in your wallet.
Once the swap is done you’ll then have exchanged one type of token for another.
DeFi Tutorial: How to trade on a DeFi exchange
What is DAI and where can we buy it?
DAI is a stablecoin created by Makers (MKR) and is backed directly by the US dollar. A stablecoin, in this case DAI, is constantly “stabilized” or “pegged” by USD giving it a constant rate of roughly $1.
In order to buy DAI, you’ll need to purchase Ethereum (ETH) from a cryptocurrency exchange and convert it to DAI over a DEX. Head to a centralized exchange of your choice and buy some ETH (make sure you have enough to cover any gas fees). Once you have your ETH, you need to send it to your wallet.
Setting up a MetaMask wallet
MetaMask is one of the more popular ETH wallets so let’s use that in this example. MetaMask runs as a Chrome extension so you can either download it from the official site or their extension download page on Chrome. Be aware that you may need to restart your browser after downloading the extension.
When you first run MetaMask it will populate seed words. Be sure to write these words down on paper and back them up where nobody can reach them. If a problem occurs, you can restore your MetaMask account with the seed phrases and maintain control over all your cryptocurrencies.
Note: DO NOT take a picture or back up the codes on any file over the internet for it’s less safe and leaves you open to having your account compromised. Cold storage, such as writing it down on a piece of paper is the most secure way!
Once you have your MetaMask wallet set up, send over your ETH from the exchange you bought it from. You can find your Ethereum address by opening MetaMask, locating your ETH wallet address on the main menu, and clicking the “Deposit” button. This is the address you need to transfer the ETH to.
Your ETH address appears in a long written form of random numbers and digits and also as a QR code. Take this code and input it when the exchange asks you before transferring the ETH funds. After completing the transfer, you are now ready to head over to a decentralized exchange.
How to connect your wallet to a DeFi exchange
Let’s use Uniswap in this example to convert your ETH into DAI.
You need to link your MetaMask wallet by clicking the upper right hand corner of the Uniswap site that says “Use Uniswap”. After, click on where it says “Connect wallet” in the upper right corner of the site. Select “yes” to allow it to connect to MetaMask.
If you see your MetaMask account displayed in the area where the “Connect wallet” button was then you’ve successfully connected your wallet to Uniswap.
The next step is to swap the ETH you have for DAI over Uniswap. When conducting this swap, it’s worthwhile to understand that this requires a transaction on the Ethereum network, and therefore gas fees are required to provide commissions to the miners.
After you press the “Swap” button and start the transaction, your MetaMask wallet automatically updates and asks you to confirm the transaction along with the needed gas fee. After pressing the “Confirm” button in MetaMask, the process starts. If the ETH network is not busy with tons of transactions, this process takes a short time and the DAI is delivered to your MetaMask wallet within a few minutes.
You can view your newly obtained DAI by pressing the menu button in the upper left corner of your wallet. If you cannot see the DAI in your account, you can go to the “Add Tokens” section at the bottom by pressing the menu button and searching for DAI from there.
You are now officially a DAI owner and have conducted your first successful DEX swap. A variety of DeFi exchanges are now at your fingertips for any transactions you wish to make.
With so many DeFi exchanges to choose from it can become confusing knowing which to use. UpBots makes this process easier with our built-in DEX swap aggregator which provides you with the best token swaps all within our easy-to-use dashboard.
Want to see how UpBots is making DeFi easier for everyone? Give our FREE demo platform a spin.
And now a meme from our community…