wallet
To do almost anything with a DEX or any DeFi product, you need to connect to a crypto wallet. There is usually a prominent “connect wallet” button. To learn more about crypto wallets, read this great article.
If you haven’t already, get the Bitcoin.com wallet, a multichain, no-custodial Web3 wallet that lets you easily manage your cryptos and interact with DEXs, DeFi, DApps, and more.
Sign
Token is a general term encompassing crypto-based digital assets or cryptoassets. These can range from cryptocurrencies like bitcoin to assets with additional features like ether or verse to NFTs. Tokens can be traded on DEXs or specialized NFT marketplaces.
The most popular type of tokens are ERC-20 tokens. The ERC-20 standard started on the Ethereum blockchain, but many blockchains are now using it. Verse is an ERC-20 token. For more information on ERC-20, see this article.
contract address
Each token has a contract address. They consist of a long sequence of letters and numbers. For example, here is the contract address for USDT on Ethereum: 0xdAC17F958D2ee523a2206206994597C13D831ec7
Contract addresses are like IP addresses. You know the one: “207.126.144.0”. Just as you almost always use a web address (e.g. www.Bitcoin.com) instead of an IP address, you typically use a token’s ticker symbol (e.g. USDT) instead of its contract address.
DEXs and other DeFi products allow you to search for a token by name or address. Popular cryptoassets can be found by name, while smaller ones often cannot. They are called contract addresses because they are made up of smart contracts. Read more about Smart Contracts here.
gas
Gas is the fee paid for working on a blockchain. With a DEX, this includes actions such as swapping, depositing, or withdrawing cryptoassets. Gas charges are usually paid in the chains’ local currency. For example, Ethereum gas is paid for in Ether (ETH). Find out more about ETH gas here.
exchange
On a DEX, you can exchange (swap) one cryptoasset for another. For example, 1 ETH token could be exchanged for 0.16 YFI. Or maybe you could trade 1 ETH for 2,500 USDT stablecoins. Stablecoins are the most popular tokens to exchange. Find out why here.
limit order
On a DEX, instead of trading your cryptoasset at the current price, you can use a limit order to limit the maximum price you are willing to pay. For example, if you want to exchange USDT for ETH, you can cap the price at 2,501 USDT per ETH.
Read more: Learn how decentralized exchanges work.
slip
Slippage refers to the price difference when an order is placed. When a buyer’s or seller’s final selling price moves up or down by more than the requested price, it is called a “slip”. Many DEXs allow you to specify your slippage tolerance, or how much you are willing to allow the final price to change.
route
On a DEX, there isn’t always a very liquid way to trade directly between two cryptoassets. Routes find the most liquid, and therefore most cost-effective, way to switch between desired assets. For example, let’s say you want to trade between ETH and NEWCOIN. The ETH/NEWCOIN pair is not very liquid, but the ETH/USDC and NEWCOIN/USDC pairs are! The DEX makes a route: ETH→USDC→NEWCOIN. If you don’t know why liquidity is so important for all markets, read this article.
aggregator
DEX aggregators are DeFi products that effectively allow you to use many DEXs at once. This makes it possible to find the most efficient way to exchange your assets. Why should you watch multiple DEXs at the same time?
In short, because aggregators can find the DEX with the best liquidity for your swap. One DEX might have the best liquidity for trading ETH/DOGE, but another is best for USDT/DOGE. Maybe two DEXs have the same liquidity, so it may be best to halve your order, one for each DEX.
Aggregators can find optimal routes and split your order up as much as needed to give you the best overall price. Aggregators focus on the liquidity of the assets you wish to trade. If you are unfamiliar with liquidity, read this important concept here.
liquidity
Liquidity is arguably the single most important measure of the health of any market, whether crypto or traditional. Liquidity is the oil that keeps the markets running. When liquidity dries up, markets can grind to a halt with catastrophic results. So what is it?
There are two basic meanings of liquidity:
- Liquidity is a measure of how easily assets, crypto or otherwise, can be converted into cash.
- Liquidity is a measure of how easily two assets can be exchanged without dramatically changing the comparative value between the two assets.
Both meanings deal with the ease of switching between two assets. Let’s look at some examples from very liquid to very illiquid:
USD ←> Yen
USD ←> stocks
EUR ←> house
Bitcoin ←> house
cars ←> house
The latter is theoretically possible, but imagine how hard it would be to trade some cars for a house! A very illiquid market indeed. Learn more about liquidity in this great introduction.
TVL
TVL stands for Total Value Locked. This is an estimate of the health of a DEX or other DeFi product. It is the US dollar value of all cryptoassets locked in a platform. A high TVL can indicate good liquidity, strong user trust, high usage, and more.
Being an aggregate indicator means there are better individual metrics for all the data points mentioned, but at a glance, TVL can be useful for very roughly comparing similar products.
liquidity pool
A liquidity pool refers to a pool of funds for a trading pair (e.g. ETH/USDT) on a DEX. Individuals who provide liquidity in a pool receive a share of the fees traded.
Liquidity is so important that DEXs often provide additional incentives to participate in liquidity pools. Without liquidity, a DEX cannot fulfill its primary purpose, which is to facilitate exchanges between cryptoassets. Find out here what liquidity is and why it is so important.
Ephemeral Loss
A temporary loss, often referred to as IL for short, can occur when you add liquidity to a liquidity pool. Before we continue, make sure you understand what a liquidity pool is (see entry above).
Ok, remember that you are deploying a pair of cryptoassets in a pool, such as B.ETH/USDT. A temporary loss occurs when the value between the two cryptoassets changes from the time you deposited them. The bigger the difference, the more IL. The loss is impermanent because if the difference goes back to what it was then you lose nothing.
IL does not become permanent until you take your cryptoassets out of the pool. Therefore, cryptoassets that trade in a narrow range tend to be the least vulnerable to IL. Let’s look at a few examples. Let’s say you added 1 ETH and 1,500 USDT to a liquidity pool last year.
Since then, the value of ETH has increased compared to USDT. Now 1 ETH is worth 3,000 USDT. You will have a temporary loss if you take your cryptoassets out of the pool. But you don’t, and the price of ETH drops back down to 1 ETH == 1,500 USDT. You withdraw your money and have no IL!
Stablecoin pairs usually have very little IL because prices are… stable! Providing liquidity in a USDT/USDC pair will have almost no IL, but you will still earn some of the fees traded.
Liquidity Provider
Liquidity Provider, often referred to as LP for short, is someone who adds liquidity to a liquidity pool. LPs earn a portion of the fees in the pool but are subject to IL. Learn more about liquidity pools and IL in the two posts above.
LP Token
LP token stands for Liquidity Provider Token. Receive this token when you deposit liquidity into a liquidity pool. This token can be used for many purposes including yield farming and collateral. LP tokens can also be exchanged for other cryptocurrencies and redeemed for the assets in the pool they represent. Read more about liquidity providers in the post above.
Liquidity Mining
Liquidity mining is an additional reward that uses a DEX or DeFi protocol to attract more liquidity. For example, when you add liquidity to a liquidity pool, a DEX will typically pay you an additional reward in addition to paying out a portion of the fees generated.
This reward is usually paid in the protocol’s native asset, although other cryptoassets are sometimes used. Liquid mining is essentially a way to rent liquidity. They do this because liquidity is fundamental to the health of DEXs and most DeFi products. Find out why here.
Mark out
Staking refers to locking a cryptoasset in a DeFi product to earn a return, typically measured in APY. Learn more about APY here.
yield farming
Yield farming is an activity in DeFi where you add liquidity to liquidity pools in various DeFi products to earn additional rewards that DeFi products offer to attract liquidity. Yield farming allows you to generate additional value while retaining ownership of your cryptoassets. Bitcoin.com’s Verse will integrate yield farming opportunities. Learn more at getverse.com.
AMM
AMM stands for “Automated Market Maker”. Most DEXs use an AMM to switch between cryptoassets. AMMs provide an automated way to trade between two assets. In traditional markets, you trade with another dealer. With an AMM, you trade for a pool of liquidity.
The AMM uses a formula to determine the price of a trade. The price is determined by the ratio of the two cryptoassets in the liquidity pool. Learn more about AMMs and DEXs here.
Ready to start trading on a DEX? Go to Bitcoin.com’s Verse DEX.
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