May 17 2021
DeFi 101

Slippery DEX, Here’s What To Look Out For

Look Out For THIS When Using Dexs

3 min read

Without exchanges, you wouldn’t even be thinking of trading crypto. They are the reasons you’ve got to make money via crypto and derivatives trading. Lots of them exist today. But you should know, they aren’t all the same nor function exactly the same. There are centralized and decentralized exchanges. We’ll be focusing on the latter — that’s why you’re here.

DEXs are currently growing in the DeFi space. Exploding in popularity and volume. However, you still need to note a few things before jumping on the trade wagon.

<text-h3>Hold up, what are decentralized exchanges?<text-h3>

DEXs eliminate the middlemen by adopting a non-custodial transaction mode. All transaction records are verified on-chain through smart contracts, no escrow required.

<text-h3>Why DEXs when there are big centralized exchanges (CEXs) already?<text-h3>

Unlike CEXs, DEXs operate using a peer-to-peer framework where no single entity controls and manages the transactions making them more secure. All transactions and assets are recorded and stored on-chain. This invariably creates no single point of failure and eliminates the supposed honeypot. You are also given complete control over your wallets, accounts and private keys. You can transact anonymously without needing to disclose private information or go through KYC procedures.

<text-h3>Now, key things to note when trading in DEXs<text-h3>

The word you’re looking for here is “slippage”.

Slippage typically happens when you settle for a different price than what you initially expected when you placed a buy or sell order. This is usually caused by a movement in price from the time you place the order and the time of execution. For instance, let’s say you made a buy order for ETH on a DEX, you expect to get the order at the price you chose.

You experience slippage when at the time of execution the price you got becomes more or less than the price you initially chose. If the buy price is more than you initially chose, it’s a negative slippage since you spend more than anticipated. A positive slippage on the other hand is when the price is less than you chose at the buy order. For sell orders, the reverse is the case.

Unfortunately, slippage is something that happens frequently in crypto markets especially in DEXs. The major causes are the low volume, low liquidity, and price volatility of crypto assets. The more slippage you experience, the more money you stand to lose. No one invests to lose, certainly not you.

<text-h3>How do I avoid slippage?<text-h3>

You can’t totally avoid slippage but you can reduce its risks and minimize your loss. First, only trade on platforms that have good liquidity and adequate infrastructure. The rule of thumb is to trade coins that have high volume and high liquidity.

Second, you can opt for smaller trade sizes that are more likely to execute, rather than making one huge trade. DEX trading normally won’t execute unless the entire amount you expect to trade is possible with the existing liquidity. If you break up the trades into smaller sizes, you have higher chances of those trades executing since there will be enough liquidity to support the entire requested amount.

Slippages are normal in trading. Don’t beat yourself up when you experience a small slip as it’s quite normal. However, make sure to take cautionary steps to reduce the effects on your investments.

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