The Difference Between Cryptocurrency Coins and Tokens

The first thing you must understand is that there is a major difference between cryptocurrency coins and tokens.

Coins are digital assets that have their own blockchain. Today, the most popular coins are Bitcoin (BTC), Ethereum (ETH), BNB Smart Chain (BNB), and Solona (SOL). There are also 100’s of other popular blockchains, such as Litecoin, Bitcoin Cash, Arbitrum, Polygon, Celo, Aptos, Optimism, and Avalanche, just to name a few. There are also Stablecoins such as Tether (USDT) and USD Coin (USDC). All these blockchain networks have one main thing in common and they have the ability to use programmable smart contracts.

Tokens are quite different from coins. Tokens can be created, issued and managed on any of the blockchain networks mentioned above. The most popular token type is Ethereum’s ERC-20 standard. Keep in mind trading tokens on a Decentralized Exchange (DEX) is very similar no matter which blockchain you are using.

What Are The Most Popular DEX Trading Tools?

The most popular DEX overall is Ethereum-based exchange, Uniswap. There are currently 6 blockchains listed on the platform: Ethereum, Polygon, Celo, BNB Chain, Arbitrum, and Optimism. Uniswap gives you the ability to easily swap tokens, search for the top 100 tokens on each network listed above, trade NFTs, as well as fund liquidity pools.

An alternative DEX exchange is popular BSC-based application called PancakeSwap. This application will only allow you to trade on the 5 most popular blockchains. These are BNB Smart Chain, Ethereum, Polygon, and Aptos.

The best tool that we’ve found to trade on all the DEX networks is DexTools.com. We recently published an article called A Review of DEXTools – The Gateway to Decentralized Finance that you will find helpful.

8 Simple Steps to Trading Micro-cap Crypto Tokens

How do you buy tokens on a DEX? It’s fairly simple! Just follow our step-by-step guide below:

1. Buy a hardware wallet or download a software wallet
2. Setup your crypto wallet via it’s mobile app or Google Chrome extension.
3. Buy your base currency, such as Ethereum, on a Centralized Exchange.
4. Send Ethereum to your crypto wallet.
5. Choose your DEX, such as Uniswap.
6. Connect your crypto wallet to the DEX.
7. Find the token that you want to trade, then pasting the contract address in the DEX.
8. Trade your Ethereum for the token you want by applying and confirming the swap.

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Centralized Exchanges Vs Decentralized Exchanges

While centralized exchanges (CEXs) are the dominant marketplaces for trading crypto, decentralized exchanges (DEXs) are growing their market share. DEXs are used for peer-to-peer trading with smart contracts to execute transactions automatically.

The main difference between a CEX and a DEX is that traders retain full control of their private keys on a DEX. Consequently, they are more secure as there is no centralized point from which private keys can be stolen. Additionally, they afford traders more freedom as on a CEX, an account can be closed, and funds unceremoniously retained by the platform.

Different Types of Decentralized Exchanges

Decentralized exchanges come in different implementations. They can utilize liquidity pools, order pools, or other innovative decentralized finance mechanisms. Below is a look at popular DEX implementations.

Decentralized Order Books

DEX order books were the first generation of decentralized exchanges. An order book compiles a record of open buy and sell orders for a given crypto asset. The spread between these prices determines the prevailing market price. Information in a decentralized order book is held on-chain during trade, while funds are held in an off-chain wallet.

A good example is the Binance DEX, the decentralized version of the popular Binance exchange. The DEX runs via an application programming interface (API), which offers traders an interface similar to the Binance CEX. It also integrates TradingView charts, which provide technical indicators. The result is a simplified trading experience.

Liquidity Pool DEXs

The second generation of DEXs relies on liquidity pool protocols to facilitate trades instead of order books. These liquidity pools determine the pricing of assets. Traders are instantly executed between the traders’ wallets in a “swap.” DEXs that use liquidity pools are ranked based on their total value locked (TVL). The TVL is the total value of the assets held in the smart contracts of the DEX.

The most popular second-generation DEX is UniSwap. Users can swap any pair of Ethereum-based assets on the platform on top of a liquidity pool. These liquidity pools are easily accessible, which ensures UniSwap is always trustless, permissionless, and democratic.

DEX Aggregators

While second-generation DEXs offer better autonomy and security, they can also lead to disjointed liquidity across various platforms. The lack of liquidity can deter institutional investors from purchasing crypto in large volumes.

DEX Aggregators are designed to address this issue. They aim to deepen the liquidity of various centralized and decentralized exchanges. One of the best examples of a DEX aggregator is the 1inch Exchange. The platform aggregates liquidity from various DEXs, limiting slippage, especially on large orders.

Slippage is caused by low liquidity on a platform, which causes the price of an asset to increase more than its fair market value. With slippage under control, traders can access the best price possible.

Summary

In 2019, DEXs accounted for only 0.11% of the crypto trading volume. However, that figure rose 80% to nearly 1% in June 2021. Just 2 years later, DEX trading volume currently stands between 5-6% of all cryptocurrency trading volume. These statistics clearly shows that DEXs are the future of the crypto markets. Familiarizing yourself with DEX trading now will put you in a position to take advantage of all crypto market opportunities in the future.

Source: K33 Research

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Disclaimer: This website provides information about cryptocurrency and stock market investments. This website does not provide investment advice and should not be used as a replacement for investment advice from a qualified professional. This website is for educational and informational purposes only. The owner of this website is not a registered investment advisor and does not offer investment advice. You, the reader, bear responsibility for your own investment decisions and should seek the advice of a qualified securities professional before making any investment.