Buying Crypto on a Decentralized Exchange
Published June 2, 2022.
Unlike centralized order book models, decentralized exchanges (DEXs) allow users to connect to the blockchain and trade cryptocurrencies directly. These exchanges work without a central authority and instead use a smart contract that contains the underlying logic and codes that defines the exchange’s functions and possibilities.
Decentralized exchanges were developed to solve centralized exchange problems such as privacy, speed, and censorship. Traditional order books are slow, and using exchanges powered by order books requires users to provide personal information, which defeats the objective of decentralization. On DEXs, all that is needed is a wallet compatible with the blockchain where they exist, and you can transact as you wish 24/7. DEXs are faster, trustless, and less expensive than centralized exchanges.
The shortcoming of decentralized exchanges is that they only support the exchange of cryptocurrencies for other cryptocurrencies or stablecoins. The crypto you exchange must be on the same blockchain. Although recent iterations and bridges make moving tokens across blockchains simple, you still incur transaction fees along with the cost of actual transactions.
DEXs also require you to connect your wallet to the internet, and the prices of tokens on DEXs can be volatile. Hackers can exploit the code if there are mistakes in the smart contract. Therefore, it is advisable to research the exchange properly and ensure that it has been audited and used by others in the community before using it for transactions.
Is It Possible to Buy Crypto on a Decentralized Exchange?
Getting started with a DEX is simple. Add the needed wallet to your browser and add funds, preferably from a centralized exchange. Even though you have fiat currencies, you must do this because it is impossible to use them on decentralized exchanges. Fiat can be easily converted to your preferred cryptocurrency using the peer-to-peer section of most centralized exchanges.
Most decentralized exchanges support the native blockchain token, which you can swap for other tokens on the same exchange. After that, you can move funds to the asset of your choice or explore the range of options and activities available on these exchanges. Some decentralized exchanges offer derivatives like futures, perpetual swaps, and options trading. You may also want to try out other features of decentralized exchanges, such as yield farming and staking, which can be lucrative but risky. Note that you cannot store your cryptocurrency on a DEX.
It is easier to buy crypto from decentralized exchanges when you already have the cryptocurrencies. Alternatively, you can move your cryptocurrency to a decentralized exchange so that you can quickly make transactions whenever the need arises. Wallets on a browser extension used to transact on decentralized exchanges are not the safest bet for securely storing your crypto. Consider getting a hardware wallet to do this without fear of hack and losses.
The Best Decentralized Crypto Exchange
Decentralized exchanges have advanced and are more efficient on the user side. DEXs are the most popular dApps on most blockchains, and they help provide users with the liquidity they need through liquidity pools. We will categorize the best exchanges based on popularity on their respective blockchains, total value locked, and other crucial factors that make them stand out.
Ethereum-based Uniswap was the decentralized exchange that brought DeFi to the limelight. It achieved a level of popularity and trading volume higher than some of the most well-known centralized platforms. Uniswap allows users to become liquidity providers by contributing their assets to decentralized liquidity pools and earning a fraction of the fees generated on the platform.
Unswap has since implemented several upgrades to the protocol that include improvements in reward mechanisms based on user participation and contribution to the platform. Unswap is practically a DAO at the moment, sponsoring the brightest ideas in the DeFi space. It rewarded its users with an airdrop of 400 UNI each in 2020, worth over $16,000 at its peak.
PancakeSwap is the most popular decentralized exchange on Binance Smart Chain (BSC). The trading volume on this exchange has hit $300-400 million on multiple occasions. The PancakeSwap team bootstrapped the project, although the exchange is now maintained with funds from the PancakeSwap treasury. The treasury is a pool of funds earned through the initial 12% of all fees allocated to the protocol. It supports thousands of BSC tokens and a native token, Cake. PancakeSwap is often targeted by DeFi traders seeking new alpha in crypto. The exchange offers a range of assets like NFTs and yield farming in multiple tokens.
Curve is a decentralized swap solution on Ethereum that allows users to trade stablecoins and other crypto assets with an almost negligible fee of 0.04%. Half of the amount paid in fees goes to liquidity providers, and the other half goes to Curve token stakers. The project uses mathematically efficient bonding curves to enable users to swap assets with minimal slippage. Curve has now expanded to several blockchains and has a total value of $9 billion.
SushiSwap is a modified fork of the Uniswap protocol. It allows traders to swap assets across multiple blockchains and layer two platforms. SushiSwap was one of the first decentralized exchanges to support the Avalanche, Stellar, Harmony, and Cello blockchain. It is especially popular as one of the first DEX to deploy on new chains.
SushiSwap allows users to add liquidity to the platform to earn fees. It also supports various features such as yield pools and on-chain lending solutions. It has a utility token known as Sushi, which can be staked on the exchange to earn a fraction of the trading fees.
How to Pay for Your Crypto
You can buy crypto on decentralized exchanges through the peer-to-peer or centralized exchange of your cash for cryptocurrencies. As soon as you pay the seller, the exchange will release your crypto, and you can transfer it over to decentralized exchanges.
How to Buy Crypto on a Decentralized Exchange
To buy crypto on a decentralized exchange, follow these simple steps:
- Buy the cryptocurrency compatible with the blockchain for that decentralized exchange on a centralized exchange like Binance.
- Next, download a Web 3.0 wallet compatible with the blockchain you want to move your funds to.
- Create a username and password and save the passphrase, which can be 12 words.
- Save your wallet's private key so you don’t lose access to your funds.
- Copy the address from the opened wallet. Ensure that this address is what shows when you click "Deposit."
- Go back to the exchange and click on "Send cryptocurrency." A dropdown will ask you to select your preferred token and chain.
- Paste the wallet address you just copied in the recipient form on the exchange. Now, click the send button and confirm after rechecking the address.
- Swap the token to your preferred asset on the exchange and explore other options on the DEX.