Crypto swapping explained.

On a decentralised exchange (DEX), a swap is not matched between a buyer and a seller as in a traditional order book. Instead, the exchange runs through a liquidity pool: a smart contract holding two (or more) tokens deposited by other users. When you deposit token A in exchange for token B, the ratio in the pool shifts and a mathematical formula automatically adjusts the price.

This approach is called automated market making (AMM). There is no counterparty specifically accepting your order; instead, the pool responds to the demand you add. The larger your swap relative to the pool, the more the price within that pool moves during the transaction itself.

Not every token pair has its own deep liquidity pool. If you want to swap token A directly for token C but that pool has little liquidity, a swap interface may split the route automatically: first from A to a commonly used intermediate token such as a stablecoin, then from that intermediate token to C. This is called routing and usually happens automatically in the background.

Aggregators are services that search multiple DEXs and pools simultaneously to find the most favourable combination of routes. They can even split a swap across several platforms at once if that produces a better net result. The outcome is typically a better price, but also a slightly more complex transaction with more underlying steps and therefore often higher network fees.

A swap typically involves three types of cost. First, network fees (gas fees) paid to the blockchain network to process the transaction, regardless of which platform you use. These fees fluctuate with network congestion and can rise sharply on a popular blockchain during peak times.

Second, the liquidity pool itself usually charges a small percentage as compensation for liquidity providers, often between 0.01% and 1% of the swap. Third, the platform or interface may add its own service fee. Together, these three components determine how much you actually end up with compared to the price you initially saw.

Before confirming a swap, almost every interface shows an overview with the expected amount of tokens you will receive, the minimum amount in case of adverse price movement, and an adjustable slippage tolerance. This tolerance determines how much deviation from the expected price you accept before the transaction is cancelled.

A tolerance set too low can cause your swap to repeatedly fail in a volatile market, while you still lose gas money on the failed attempt. A tolerance set too high exposes you to a significantly worse price or to so-called front-running, where a bot sees your transaction coming and profits from it. See the guide on slippage for a more detailed explanation.

Before a DEX can move tokens out of your wallet on your behalf, you usually need to sign a separate 'approve' transaction that grants the smart contract permission for a specific token. This is a separate step from the actual swap and also costs network fees.

Many wallets and interfaces offer a choice between an unlimited approval (convenient for repeated use, but riskier if the contract is ever found vulnerable) or an approval limited to exactly the required amount. For those who prefer caution, limiting approvals to the swap amount is a sensible habit, even though it requires a new signature for each subsequent swap.

Beyond market risk, swapping carries a few specific risks. Entering the wrong token address or selecting a counterfeit version of a popular token can result in swapping into a worthless token, especially when using lesser-known interfaces. Always verify the contract address through an official source before swapping a new or unfamiliar token.

There is also the risk of vulnerabilities in the underlying smart contract of the DEX or pool itself. Larger, longer-established protocols have typically undergone multiple external audits, which reduces but does not fully eliminate that risk.