How and Where to Exchange On-Chain

On Apr 22, 2023

If you’ve been buying, exchanging and hodling your crypto on exchanges, you may be wondering how you might do the same in decentralized exchanges on-chain. This has been a more common question lately as the US and other countries start cracking down on centralized exchanges. In my experience, you have much more freedom and a more diverse way of making your crypto earn more on-chain, where there are generally less fees and less control.

The coins you’ve invested in on a centralized exchanges will determine what chain you’ll want to move them to. We’ll focus on the Ethereum chain today, because it is the most commonly used.

In order to move your Ethereum based coins off of a decentralized exchange you’ll need an Ethereum based wallet. There are many to choose from, but MetaMask is the most popular. Once you’ve setup your Ethereum based wallet (dont forget to write down that seed phrase), you can transfer coins easily to your wallet by copying your wallet address and pasting it into the send field of your centralized exchange’s transfer menu. Be sure to specify which chain you’d like to transfer your coins to; Ethereum and its compliant coins are used on many different compatible chains.

Once you have your coins transferred you can hodl them in your wallet, use them in defi applications, or you can swap them on decentralized exchanges or DEXes. There are many types of dexes on-chain, most of which will be familiar to you since they typically exist in some form in the centralized exchanges.

The first category are swap dexes. Swap dexes are the most simple and decentralized. Their primary function is to swap one coin in equal value with another. The most commonly used Ethereum based dex is Uniswap. Uniswap uses user and protocol own liquidity and pools them together to create liquidity pools that are supplied in exchange for trading fees paid to the owner of the coins that are pooled.

The second category is a perpetual futures exchange. These exchanges are used by traders to speculate on price changes. These are another common feature of centralized exchanges, some of which give you the ability to multiply your leverage, this too is common on-chain. Perpetual exchanges differ from swaps because they are typically settled in dollars rather than the coin being traded.

The collapse of FTX and a tightened regulatory environment has sent traders on-chain which has lead to some exceptional growth. The largest perpetuals dex is GMX which operates on the Arbitrum and Avalanche chains, both of which are Ethereum compatible. On GMX you can deposit USDC to long or short the price of blue chip crypto like BTC and ETH.

Perpetual dexes need liquidity just like swap dexes do, so if you’re not a trader, you can certainly profit from providing liquidity to these dexes as well. In fact, one of my favorite protocols to LP in is GMX. Their liquidity product is called GLP and it is made up of both blue chip crypto and USD coins. On a regular basis GLP is providing a high rate of return, but beware that GLP is the counter-party to the degen leveraged traders. If Bitcoin or ETH goes into a non-stop up-trend and the majority of traders leverage long, GLP will decrease in value.

There are a multitude of variants to these two types of exchanges, but for now the two main functions of a dex are to either swap coins or speculate on price. Each dex is competing for market share and most are constantly innovating or incentivizing swappers, traders and liquidity providers to participate. If you’d like to learn more about specific exchanges, I suggest you check out my YouTube channel AllThingsETH to watch some deep dives into different on-chain protocols, or follow me on twitter for more content like this.