In our previous posts, we first talked about the theory of money and what gives it value then we explored valuation models for Bitcoin and finally you should have bought your first crypto in the form of a stablecoin - USDC.
Use the links below if you haven’t to catch up:
In this post, we’re going to dive into trading for your first real form of money (see what I did there) and buy some Bitcoin or Ethereum using a decentralized exchange commonly referred to as a DEX.
What is a DEX?
With a traditional centralized exchange or CEX, a buyer and seller meet through a trusted entity - the exchange (Binance, Coinbase, etc.) where their tokens are deposited and can be withdrawn after the trade.
With a decentralized exchange, the trusted entity in the middle is instead replaced with a smart contract which maintains the deposited tokens and users can place buy or sell orders to the smart contract.
CEXs are what we have been accustomed to for the last 100 years, we use them everyday from the New York Stock Exchange to the Nasdaq.
DEXs represent a fundamental shift brought about by smart contracts and programmable money allowing true p2p trading.
CEX vs DEX
Benefits of CEXs
Faster Transactions
Centralized exchanges have faster transactions between users. They run a centralized order book and run trades through their servers. As a result, orders can be filled much faster without having to wait for confirmation on a public blockchain.
Cheaper Transactions
Since they don’t use a limited public resource, they can offer much cheaper transaction fees for both makers and takers. For instance, Binance has fees ranging from 0.075% to 0.015% per transaction while fees on UniSwap start at 0.3% + gas fees to use the Ethereum network.
More Liquidity
At the moment and for all the reasons above, centralized exchanges control the majority of liquidity and trade volumes in the space. To give you an idea, in the last 24 hours DEXs processed $41 million in transactions while CEXs was over $28 billion.
No Smart Contract Risk
Probably the biggest risk on this list is that the smart contract has a fatal bug and allows the contract to be drained of all funds.
While centralized exchanges have also been hacked (see Bitfinex) or were just scams (see QuadrigaCX), they usually have measures and insurance in place to remedy any risks involved.
Benefits of DEXs
No KYC Requirements
For the most part, all centralized exchanges now require intrusive KYC requirements before you’re able to trade. This information could be stolen or presented to authorities down the line. Not only does it take longer to get started but presents a breach of your privacy.
Self-Custody of Funds
With one Ethereum wallet address, you can interact with any decentralized app (dApp) on the network. In a previous post, we setup Argent which kept the funds in your possession on the wallet but allowed you to interact using Wallet Connect to DEXs which I’m going to show you later in this post.
Less Risks of Hacks
While DEXs have smart contract risk, they also aren’t subject to traditional hacks performed on CEXs if coins are held offline
These exchange hot wallets can be exploited by a user mistake (e.g. visiting the wrong website and entering credentials), a social engineering attack (e.g. SIM swap stealing your 2FA) or failure on the part of the exchange.
Profit Opportunity
The latest DEXs allow users to provide liquidity for any token pair and earn transaction fees proportional to the liquidity they provide. Over the last year, liquidity providers have earned $2.8M in fees from traders using the UniSwap platform.
Summary
To wrap everything up, I will say that I prefer to trade on decentralized exchanges as they have become easier than navigating and opening different accounts across CEXs.
If you keep the majority of your funds in cold storage, you can reduce your exposure to smart contract risk. Moreover, as I’ll show below new decentralized exchanges have emerged making the transaction speed and cost per trade on par with traditional exchanges.
If you want to earn fees from providing liquidity, I would recommend getting a quote on smart contract insurance through Nexus Mutual. It costs around 1.3% to cover yourself against UniSwap contract risk for 365 days but this could change depending on the amount, version, etc.
Ok, let’s get started!
Making Your First Trade
I’m going to present you with three options to conduct your first trade from basic to advanced depending on your time and willingness to dive deep.
Option 1: Basic (30 seconds)
If you have followup my earlier post, you should be setup with the Argent Wallet where you can trade directly for Ethereum or Bitcoin (on Ethereum).
Open Argent Wallet
Trade
Select “Trade Tokens” and find the token you want to trade for - either ETH or wBTC. Click “Buy”, enter the amount and confirm the transaction.
Congrats! You made your first trade. 🚀
Option 2: Intermediate (5 mins)
For a more advanced version, we’re going to connect to a dApp called UniSwap Exchange using an open source connector called Wallet Connect.
Don’t worry if you don’t know what this all means right now, I walk you through it below and it’s super simple.
Go to UniSwap.exchange
Connect your wallet
At the top right of your screen, click “Connect to a Wallet” and then choose “Wallet Connect”. Click on “Scan” in your Argent Wallet and scan the QR code shown on screen. You are now connected.
Trade
Select USDC as your “From” option and choose ETH or wBTC as your “To” option and then follow the instructions to confirm it.
You should have received a notification on your phone requesting you to authorize the transaction. This is how the process works across most dApps showing you how simple it is once you’re set-up.
Option 3: Advanced (15 mins)
Recently, we were given a presentation by Loopring and I was blown away by their exchange. Loopring is able to compress transactions using what’s called a ZkRollup meaning they can perform 2,025 transactions per second while retaining the security guarantee of the main Ethereum chain.
Their fees are also very cheap at 0.06% to 0.01%.
Go to Loopring.io
Connect your wallet
At the top right corner, click “Connect Wallet” and proceed to connect through Wallet Connect as in the example above. Alternatively, you can download Metamask, create a wallet and connect.
Register your account
Go to the top right corner again, click your address and go down to “Register account”. Follow the prompt to sign and register the account. This can take up to 30 minutes.
Deposit Funds
Once that is complete, go to “Account” at the top and follow the prompts to deposit funds into the trading account. This again can take some time.
Trade
Finally, head to the “Trade” tab and trade as you normally would through any centralized exchange. It even has the same look and feel.
As I went through this process, I found the initial setup quite painful but the trading experience was pretty awesome and well worth it in the end.
Hope you had some fun following along - be sure to share this with friends and family who have been on the fence about getting into crypto.
Around the Space
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VISA files patent for crypto cash on Ethereum
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JP Morgan to provide banking services to crypto exchanges
Three years after its’ CEO labeled Bitcoin a “fraud”, JP Morgan has conceded and is now providing banking services to both CoinBase and Gemini. With bigger onramps to crypto expect a huge exodus to finance 2.0 where money transmission will be cheaper, faster and more private.
First Ever DAO Investment in History
I like to report fundamental shifts in how society is organized and I believe this is one of them. For the first time, a decentralized autonomous organization voted to invest in a venture and deploy funds. DAOs as on-chain venture capital could change the game over the next decade.
Next week we’ll explore a dApp to help you dollar cost average into the market so you don’t have to do these trades manually every week. Make sure to subscribe!