Though I identify as a trader, I actually barely trade these days. I haven’t placed a limit order in months, or for that matter clicked either the “Buy” or “Sell” buttons. I haven’t used a username or email to authenticate myself, and have withdrawn most of my assets from reputed exchanges such as Coinbase, Gemini and Kraken (Binance is banned in NY ): Nonetheless, this summer alone I have executed hundreds of transactions across multiple blockchains for all sort of tokens.
If you follow DeFi, you’ve probably encountered a project name with the suffix swap: UniSwap, PancakeSwap, SushiSwap, QuickSwap, HoneySwap, ParaSwap, ApeSwap, ShibaSwap, CumSwap…all of these are Decentralized Exchanges (DEX) that enable the swapping of one digital asset to another, using an Automated Market Maker (AMM) as an intermediary instead of fiat currency. For the time being I will skip over the internal mechanics, but feel free to Google “AMM DEX” if you are curious. Note there is no connection or resemblance to CeFi Credit Default Swaps as seen in “The Big Short”.
Consider the below screenshot: on the left we have Coinbase Pro, a familiar centralized exchange with an “Order Book” containing all active buy and sell limit orders. On the right, we have a simple Uniswap v3 ETH-UNI confirmation dialog.
Why bother? What’s so bad about using exchanges and trading like a normal person? What are the benefits of swapping, and more generally storing assets in your own wallet?
Similar to traditional web-based apps on your mobile devices or computer, Dapps (decentralized apps) published to a blockchain network provide an increasing variety of Web3 services, experiences, and ways to use your crypto. These include gaming, betting, premium content, video streaming, NFTs, curated datasets, litigations, carbon credits, and many more use cases on the way. If you want to participate in the ecosystem, you must have custodial ownership of your assets as well as the tools to interact with Dapps. Funds held within Coinbase and other exchanges are non-custodial, however, and can generally only be accessed from within the platform.
While this may sound more secure, it’s actually far from ideal: investors cannot delegate their tokens to participate in a “Proof-of-Stake” network or vote on governance proposals, nor can they pool liquidity and earn rewards from “yield farming” (which I review in great depth in this article series). When a new token launches, investors have to wait months until it is listed on an exchange. And if that’s not enough, most DEXs will never impose regional restrictions on anyone, anywhere, ever. Swapping is a universal right!
It’s surprisingly easy to get started: simply install MetaMask browser extension, save and backup your wallets cryptographic “seed phrase” (a special sequence of words), and set a strong password. You will be automatically assigned a unique address in the format “0x3a14Ef4….a75e”, which you can use to transfer crypto from any other wallet or exchange. By default MetaMask connects to the “Ethereum Mainnet”, which is currently the most mature blockchain network.
And naturally, the leading DEX resides here: Uniswap’s daily transaction volume averages no less than $1Billion, and the platform has roughly $7Billion “Total Value Locked (TVL)” by users in smart contracts. It’s v3 upgrade to non-fungible “concentrated liquidity” is an absolute game-changer for DEX technology, and the rest of the industry may soon follow suit.
Once you have some ETH or Ethereum-based assets (ERC20 tokens) in your wallet, you can head straight to Uniswap (or any ETH-based DEX) and try it out. If you don’t already have crypto assets to transfer, you could potentially buy ETH via MetaMask’s partner company Wyre, but this is somewhat wasteful due to the card processing fees and suboptimal exchange rates. I use centralized exchanges, namely Coinbase Pro, to deposit USD from my bank account, convert it to USDC or another token, then withdraw to my MetaMask wallet address. This withdrawal incurs a small transaction cost, but is far more cost efficient than purchasing using a credit or debit card.
Since this is not investment advice, I will refrain from suggesting any specific tokens. I will, however, list out Dapps you can use to swap for your next moonshot, index basket, or whatever ERC20 tokens strike your fancy: Uniswap, SushiSwap, and Bancor are the more reputed ETH-DEX options.
Next we turn to Binance Smart Chain (BSC), the main competitor to Ethereum. It’s based in China and started as literally a “fork” (clone and edit) of the Ethereum codebase, implemented with centralized architecture to minimize gas fees and maintain control of the network. Since I am American I cannot access Binance, and since I have a New York state ID I am unable to sign up for Binance.us.
In my quest to obtain Binance coins (BNB), and admittedly swap most of it to PooCoin and CumRocket, I found numerous “converter” platforms that I am almost certain do not function as a DEXs. Somehow, these platforms convert the supplied assets into tokens on a different blockchain, and send them to the provided recipient address: I can send ETH (ERC20) and receive BNB (BEP20), THETA (TNT20), and other coins despite the lack of a trading pair or liquidity pool. I assume they sell, buy, and transfer funds on the backend, but am not certain. The main takeaway is that platforms such as Challangley and SimpleSwap will reliably convert your crypto between blockchains, no questions asked. This can be valuable tools especially if, like myself, you cannot access Binance or are the mercy of other such regional constraints.
In order to swap on BSC, you will need to setup two more things. Download TrustWallet from the app store, click the option that most resembles “import/restore existing wallet from seed phrase”, and input the words you saved from MetaMask. This imports your existing ETH wallet, and creates new compatible wallets for other assets: most crucially a BNB wallet of the format “bnb17sa…..0x2r” where you can receive BNB tokens from Binance or otherwise. You may need to adjust the “settings” from the top-right to toggle BNB visibility.
Next, add the Binance network on MetaMask by clicking the dropdown menu that is set to “Ethereum Mainnet”, click “Custom RPC”, and add the following details (as officially instructed by Binance). MetaMask supports multiple chains, and you can easily switch between them by changing the selection in the dropdown menu. You can alternatively use this website “ChainList” and add Binance and other networks such as Polygon, Arbitrum, and Celo.
- New RPC URL: https://bsc-dataseed.binance.org/
- ChainID: 56
- Block Explorer URL: https://bscscan.com
Depending on how you obtain the BNB, you may need to convert it to Smart Chain in TrustWallet: select BNB (yellow token), tap “More”, then select “Swap to Smart Chain”. Once you verify the BNB balance in MetaMask is the same as your Smart Chain (black token) balance in TrustWallet, the hard part is done. Your MetaMask and TrustWallet are in sync, and you now have access to the world of BSC tokens!
PancakeSwap is the largest BSC-based DEX with trading volume comparable to Uniswap. These two DEX’s are like Messi and Ronaldo, switching between 1st and 2nd place with a roughly 18% market share each, at the time of writing. But it is important to remember that you cannot swap any tokens between the two! Uniswap (ERC20) and PancakeSwap (BEP20) tokens are incompatible with one another, which is why we set up the TrustWallet “bnb7a5…s8d” address. Analogously, I doubt we will ever see Messi pass the ball to Ronaldo…
Anyway, BSC hosts myriad DEXs many of which are rebranded “forks” of an existing codebase, such as the Wakanda-themed PantherSwap. Based on personal experience, I would steer clear of recently-launched DEXs that have smaller and less predictable liquidity pools, as this generally leads to inefficient pricing (“slippage”) and potentially other more serious issues. PancakeSwap and perhaps ApeSwap would be my recommended BSC-DEXs.
As I mentioned before, this is not investment advice — I should, however, point out that Binance may actually be the largest blockchain network now. This is in part due to the surge in popularity of “GameFi”, the gamification of financial mechanisms where users can earn profits by playing games (CryptoBlades and its “play-to-earn” model). Binance’s CEO seems bullish:
If you actually attempted a swap on an ETH-based DEX, you probably noticed the exorbitant gas fee required. And if you approved the transaction, you must have waited for at least 10 seconds (probably more) until the swap was confirmed. As highlighted by the Binance CEO above, gas fees and the resulting reluctance to transact is one of the biggest roadblocks in DeFi today. In part, this is caused by its own success: since gas fees are paid in ETH and its value has appreciated by several hundred percent in 2021, the transaction costs increase proportionally…
For this reason, many investors have temporarily flocked to other blockchain and layer 2 networks, most notably Solana (SOL) and Polygon (MATIC). Unlike blockchains such as Terra and Fantom which primarily support their native tokens, Solana allows users to deploy new tokens on-chain that adhere to the “SPL” specifications, such as TULIP, ROPE, MNGO, and USDC. These SPL tokens can be pooled and swapped only on SOL-based DEXs, analogous to the what we reviewed for Ethereum (ERC20) and Binance Smart Chain (BEP20) blockchains.
Due to its unique Proof-of-History architecture, Solana boasts almost negligible gas fees and essentially operates at web-speed. You need to see it to believe it: “Break Solana” is a brilliant gamified way to illustrate the computing power of the network. The user is prompted to press as many keyboard buttons as possible in 15 seconds, each of which represents a blockchain transaction. See my results below: these 387 transactions used 0.052% of Solana’s capacity, but would have taken 172% of Ethereum’s and 561% of Bitcoin’s capacity. And with an average duration of 2 seconds, transacting on Solana provides the experience we have become accustomed to with high-speed internet and low-latency cloud services.
This ease of computation allows for fast and cheap swaps on SOL-DEX’s. For those familiar with swapping on Ethereum blockchain: imagine a 2 second transaction that costs roughly a cent! And for those with a sharp eyes who see a Gmail tab with title “[DEXLAB]” — I swapped for about 50k of DXL shortly after it launched, and am not at all unpleased with the outcome…I can’t imagine it will be listed on a reputed exchange any time soon, so am extremely glad I set up the necessary wallets and tools to make this early investment. Phantom and SolFlare are the top Solana browser extension wallets, and work very similar to MetaMask.
Despite its youth, Solana has emerged as a top-10 cryptocurrency this year, and I can’t see it losing steam any time soon. SOL was listed on Coinbase in mid-June, so it is far easier to obtain than before when I had to use Challengley or another “converter” platform for ETH to SOL. To move funds onto the Solana blockchain, you can trade and withdraw SOL from Coinbase to your Solana wallet, or alternatively use Sollet to convert your ERC20-USDC to SPL20-USDC. In terms of DEXs, I personally like Raydium’s swap interface, but Serum is probably the bigger name.
FYI: the reason my SOL balance is so low is that I have staked most of my tokens to support transactions on the network! This would never be possible with SOL held on Coinbase or other exchanges.
Last but not least for now, Polygon (aka. MATIC) — an innovative, effecient sidechain protocol that runs in parallel to the Ethereum mainnet with periodic checkpoints. The India-based blockchain’s widespread adoption has propelled it to a top-20 cryptocurrency and attracted big-name investors. You can learn a lot more, including the origin story of developing a globalized app to bet on who will die next in “Game of Thrones”, in my friend’s excellent article.
Since Polygon is a sidechain of Ethereum and conforms to ERC20 standard, the available tokens are mostly consistent with Ethereum, but transaction fees are dramatically lower. Matic provides an out-of-the-box web wallet that provides tools to “bridge” assets between Ethereum and Polygon, which can then be swapped on MATIC-DEX’s such as QuickSwap, SushiSwap, and more recently Curve.
As we can see, there is no shortage of DEXs across the various blockchains. But do you expect me to rapidly check each individual DEX for the best price? I hope not, since I wouldn’t expect you to either. DEX Aggregators such as 1inch, DODO, ParaSwap, Matcha, and Dex.ag check the exchange rate across numerous DEXs (including their own), and offer the optimal rate to the user who can then confirm or reject the transaction.
Some aggregators such as Dodo and 1inch support multiple chains, so you can swap on ETH/BSC/MATIC networks using the same Dapp and wallet! In my experience the % saved using aggregators (or limit orders where they are supported) is somewhat minimal, especially compared to the % gains I am hoping for. That being said, aggregators are a powerful tool for arbitragers and more technical investors.
I hope this guide helps you set up your gateway to DeFi and its various different blockchain networks. See below for a financial architecture diagram that illustrates what we have set up here. Please comment if you think I am missing a major project or protocol!
Pro’s of Swapping:
- Access to any token, not just those listed on an exchange
- No regional restrictions
- Get in early, buy on day 1
- Custodial possession of funds: can earn by staking, LPs, yield farming
- Integrations with web wallets and chrome extensions
- Increasing support for limit orders
Con’s of Swapping
- Inefficient fiat ramp: avoid use of credit or debit cards
- Can be unrecoverable if password and seed phrase are lost
- Price Slippage: mainly an issue for volatile tokens with smaller liquidity pools
Now that you have custody of your crypto, you can implement innovative DeFi investment strategies such as staking, liquidity mining, and “Yield Farming”. Head over to my CryptoAgricultural exploration article series to get started!
Bonus: Tax Implications
Note this section is under review and development. I am exploring how to optimize capital gains taxes, initially in the US.
- 1031 exchange not applicable
- Cost basis calculation method is the way to go [more to come…]
