Cardano officially entered its DeFi summer in 2023, with TVL tripling since January! To understand what has driven this rise in Cardano DeFi, see the article on why Cardano’s TVL is rising. With this, now is as good a time as any to get involved in Cardano DeFi, and using a DEX is the first stepping stone into the world of DeFi — so here’s the what, the why, and the how!
What is a DEX?
A centralized exchange, i.e., a stock exchange, is where a middleman, a central clearinghouse, facilitates exchanges between users. A DEX (Decentralized EXchange) is a place where asset exchange is automated, with no need for an intermediary.
Self-executing smart contracts or matchmaking bots execute transactions on a DEX. These transactions are completed in a permissionless manner, and no one can prevent a user from partaking in exchanges.
How do DEXes Work?
There are two models that a DEX can use:
The Automated Market Maker (AMM) model, first popularized by Ethereum’s Uniswap, is the most popular. Tokens are paired in pools of liquidity provided by users, and the exchange rate for the tokens is set by the ratio of tokens in a pool. When exchanging assets, a user is simply adding one token to the pool and receiving the other—paying a small fee to the liquidity providers in the process.
Examples include: Minswap, SundaeSwap, WingRiders
The Order Book model is the same as that used by centralized exchanges. Users place buy or sell orders for a token at a particular price. These orders are stored on-chain, and a matchmaker pairs matching orders to execute trades, earning a fee for doing so. The assets’ exchange rate is the price where the buy and sell orders converge. Users can also conduct “market orders”, where they buy or sell their assets at the current exchange rate.
Examples include: MuesliSwap
How to Swap Tokens on a Cardano DEX
Here we use the Minswap DEX (but the process is very similar across all DEXes) and assume that you own some ADA and have a dApp compatible Cardano wallet.
- Select “Connect wallet” from the menu bar of the Minswap app and connect your wallet.
- Select “Trade” in the menu bar.
- ADA will be preselected in the “From “ dropdown box. Click the “Select a Token” dropdown box in the “To” section. “From” is the asset you’re selling, and “To” is the asset you’re buying.
- From the list that pops up you select the token you want to buy. Here we’re going to select the platform’s token, MIN.
NB: Verified tokens have a checkmark next to them. If you toggle verified tokens off you will see more tokens, but be careful. There are many tokens imitating real ones, and swaps cannot be reversed.
- Now, you can either type the amount of the token you want to buy or the amount of the token you’ll want to sell, and the other box will auto-populate. Here we’re buying 100 MIN. Click “Swap” to confirm your trade.
- A popup provides a breakdown of all the elements of your trade. Hover over the ℹ︎ symbol to learn more about each element of the trade. Scroll down to find and click the “Confirm Swap” button. Follow the instructions for signing the transaction.
- Depending on blockchain congestion, your transaction will take between a few seconds and a few hours to be processed (most transactions are processed in under 10 seconds). A pop up will tell you when your transaction was successful!
🎉 Congratulations! You just bought assets on a DEX 🎉
Swapping is Just the Beginning!
Swapping tokens is a simple task once completed once or twice, and knowing how to swap tokens allows you to obtain the tokens needed to interact with other Cardano protocols!
Minswap is not the only DEX on Cardano, and each DEX has its own fee system and set of features that makes it unique. Don’t know where to start researching? Check out this article looking at Cardano’s top 3 DEXes to get started!
Disclaimer: This article is not financial or investment advice, it is solely an excellent how-to guide for using a decentralized protocol. Using decentralized protocols comes with inherent risks which the user assumes the whole responsibility for.
