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Using a Decentralized Exchange (AMM Basics)

Decentralized exchanges (DEXs) allow users to trade tokens without relying on a centralized intermediary. Most modern DEXs employ an Automated Market Maker (AMM) model—where liquidity pools replace traditional order books. This tutorial walks you through connecting a wallet, swapping tokens, and providing liquidity on popular AMM-based DEXs.

1. Wallet Connection
  • Choose a Compatible Wallet: Options like MetaMask, Trust Wallet, or WalletConnect-based apps typically support AMMs (e.g., Uniswap, PancakeSwap).
  • Authorize DApp Access: When prompted, confirm the DEX domain is correct, and approve the connection.
  • Network Selection: Ensure you’re on the right blockchain (Ethereum, BSC, Polygon, etc.) to find the correct liquidity pools.
2. Swapping Tokens
  1. Pick Token Pairs: Select which token you’ll spend (e.g., ETH) and which you’ll receive (e.g., DAI).
  2. Check Slippage Tolerance: AMM trades can have slippage, so set your tolerance or use “auto” for typical conditions.
  3. Confirm Swap: Review the final amounts, gas fees, and output estimates, then click “Swap.”
  4. Transaction Approval: Approve the transaction in your wallet and wait for network confirmations.
3. Providing Liquidity to Earn Fees
  • Select Pool: Pair two tokens (e.g., USDC/ETH) in equal dollar value, deposit them, and receive LP tokens.
  • Earn Trading Fees: Every trade on that token pair shares fees with LP token holders, proportionate to their contribution.
  • Beware Impermanent Loss: Price divergence between the two tokens can reduce your liquidity value vs. simply holding.
4. Advanced AMM Features
  • Liquidity Farming: Some DEXs also offer extra governance token rewards for locking LP tokens in “farming” contracts.
  • Limit Orders (Certain AMMs): Some DEXs integrate limit order functionality or aggregator services for better trade execution.
  • Multiple Networks: Many AMMs operate on various chains, each with unique pairs and transaction costs.
5. Security and Best Practices
  • Verify the DApp URL: Avoid phishing duplicates. Always confirm domain spelling and SSL certificate.
  • Revoke Unused Approvals: Over time, you might accumulate “infinite spend” approvals—use a revoke tool to remove them when not needed.
  • Gas Fees Monitoring: Busy networks lead to high fees; consider transacting during off-peak times.
6. Conclusion

Decentralized exchanges powered by AMMs deliver a trustless, permissionless way to swap tokens and earn fees through liquidity provision. While no centralized authority holds your funds, the responsibility for security, slippage, and impermanent loss management rests on your shoulders. By mastering these basics, you’ll be well-prepared to explore the broader world of DeFi—from yield farming to advanced aggregation tools—and take control of your trading experience.


Tags: Using Decentralized Exchange AMM Basics
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