Swapping Tokens & Using DEXs

📘 Lesson 3: Swapping Tokens & Using DEXs

Intro:

Swapping tokens using DEXs is one of the most essential actions in decentralized finance (DeFi). Whether you’re exchanging ETH for USDC or exploring lesser-known tokens, decentralized exchanges (DEXs) allow you to swap assets directly from your wallet, without relying on centralized intermediaries. This lesson will help you understand how to perform token swaps securely and efficiently.

🔍 Overview

This lesson walks you through how token swaps work on decentralized exchanges, the concept of liquidity pools, how automated market makers (AMMs) determine pricing, and what risks and fees to expect. You’ll also learn to evaluate slippage, gas costs, and how to approve token spending securely.

📋 What You’ll Need to Know

1. Prerequisites:

• A crypto wallet already set up and funded
• Completed Lesson 2: Sending & Receiving Crypto
• Basic understanding of Ethereum and ERC-20 tokens

2. Target Audience:

• Crypto users ready to move beyond basic transactions
• New DeFi participants exploring swaps and DEX interfaces
• Anyone interested in tokenomics, liquidity, and trading

📚 Lesson Content

Swapping Tokens Using DEXs is a foundational skill in the world of decentralized finance. In this lesson, you’ll learn how decentralized exchanges (DEXs) like Uniswap and SushiSwap enable permissionless token swaps, how liquidity pools function, and how to evaluate slippage, gas fees, and token contracts before making a trade. This content is structured to help you gain both theoretical understanding and hands-on confidence.

✍️ Content

🔄 What Is a Token Swap?

In the world of DeFi, a token swap is the process of exchanging one crypto asset for another directly from your wallet using a decentralized exchange. Unlike centralized platforms, DEXs enable peer-to-peer swaps using smart contracts, with no intermediary holding your funds. You simply connect your wallet, select a token pair, and confirm the trade.

⚙️ How Decentralized Exchanges Work

Decentralized exchanges like Uniswap, SushiSwap, and PancakeSwap use Automated Market Makers (AMMs) instead of order books. AMMs rely on liquidity pools, which are smart contract-held reserves of two tokens. These pools allow users to swap between assets based on a mathematical formula that automatically adjusts prices depending on supply and demand.

For example, if a lot of people swap ETH for USDC in a pool, the price of ETH rises relative to USDC to reflect reduced availability.

💧 What Are Liquidity Pools?

A liquidity pool is a pair of crypto assets locked in a smart contract that enables swapping between them. Contributors to these pools, known as liquidity providers (LPs), earn fees each time a trade occurs. However, LPs also face impermanent loss, which occurs when the price of the pooled tokens changes significantly after deposit.

As a user, you interact with these pools by selecting two tokens you want to swap, and the DEX does the math behind the scenes.

🧮 Understanding Slippage and Price Impact

Slippage refers to the difference between the expected price and the actual execution price of your swap. When liquidity is low or trade sizes are large, slippage increases. Most DEXs allow you to set a slippage tolerance, which automatically cancels the trade if price impact exceeds that percentage.

Price impact is the effect your trade has on the pool’s price balance, especially for less liquid tokens. Always monitor these values before confirming a swap.

🔐 Token Approvals and Security

Before a token can be used in a DEX, you must approve it. This is a security measure that grants the DEX’s smart contract permission to spend the token on your behalf. Approvals are managed per token and per DEX, and it’s important to revoke unnecessary or outdated approvals using tools like Revoke.cash.

Only approve what is necessary, and avoid setting “infinite” approval values unless you’re highly experienced.

📝 Swapping in Practice

Here’s how a typical swap works:

1. Connect your wallet to the DEX interface.
2. Select the token you want to swap from and to.
3. Set the amount and review the slippage and fees.
4. Confirm the token approval (if it’s the first time using that token).
5. Submit the swap and confirm via your wallet.
6. Wait for the transaction to be mined, and then verify on a block explorer.

Once confirmed, the new token should appear in your wallet, depending on your wallet’s ability to detect custom tokens.

✨ Key Elements

• Automated Market Makers (AMMs)
• Liquidity Pools
• Slippage tolerance
• Gas fees and on-chain confirmations
• Token approvals and security practices

🔗 Related Terms:

• Token Pair
• DEX Aggregator
• Impermanent Loss
• Liquidity Provider
• Smart Contract Approval
• Front-running