How to trade on a Bitcoin DEX: A step-by-step guide
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Decentralized exchanges (DEXs) have fundamentally changed how we can trade cryptocurrencies. Instead of relying on traditional centralized exchanges (CEXs) like Binance or Coinbase, DEXs offer a more secure, private, and self-sovereign way to trade.
In this guide, we highlight what a DEX is, how it works and give you a step-by-step guideline on how you can trade on a DEX from your phone or computer. Let’s dive in!
What are Bitcoin decentralized exchanges?
A decentralized exchange (DEX) is a platform that enables cryptocurrency trading without a central authority. On DEXs, users trade directly with one another, maintaining control over their assets.
This peer-to-peer model contrasts sharply with centralized exchanges, which act as custodians, holding users’ funds and managing the order book.
Bitcoin DEXs are a bit unique compared to those on blockchains like Ethereum or Solana, as Bitcoin was originally designed as a peer-to-peer payment network. However, with Layer 2 solutions and protocols like Stacks, Bitcoin now has a growing DeFi ecosystem that includes decentralized exchanges that enable decentralized runes trading and the trading of other Bitcoin-powered assets.
These exchanges leverage the security and popularity of Bitcoin while offering the flexibility of DeFi applications, letting users trade Bitcoin-backed assets in a trustless, decentralized way.
Types of Bitcoin DEXs
Below are some types of DEXs that you should know about.
Order book DEXs
Order book DEXs operate similarly to traditional exchanges, relying on a list of buy and sell orders to match trades. In this system, users set orders specifying the quantity and price at which they want to buy or sell an asset. The DEX then matches buy and sell orders either automatically or through user interaction.
Bitcoin DEXs like ALEX utilize this model. However, the order book can be either on-chain (stored on the blockchain itself) or off-chain (managed off the blockchain). On-chain order books are highly transparent and decentralized but can be slower and more costly due to blockchain transaction fees. Off-chain order books, on the other hand, are faster and more affordable but rely on a degree of trust in the off-chain provider.
Automated Market Maker (AMM) DEXs
Another popular model is the Automated Market Maker (AMM), which uses a liquidity pool instead of an order book. In AMM-based DEXs, users supply pairs of assets to a pool, which can then be traded by others on the exchange. AMMs calculate prices using a mathematical formula based on the ratio of assets in the pool, allowing for continuous trading without waiting for a match with another user.
In the Bitcoin ecosystem, AMMs are starting to emerge on platforms built on Bitcoin layers, such as Stacks. This model is ideal for those wanting high liquidity and flexibility, although slippage—the difference between expected and actual trade prices—can occur during trades, especially with low liquidity pools.
DEX aggregators
A more recent innovation, DEX aggregators, aims to solve liquidity issues by pooling liquidity from multiple exchanges. They can route a single trade across several DEXs, minimizing slippage and optimizing the trade price.
Bitcoin DEX aggregators, though not yet as widespread, could become more common as the DeFi ecosystem on Bitcoin matures.
How to trade on a DEX: A step-by-step guide
Now, let’s look at how you can trade on a decentralized exchange like ALEX using the popular Bitcoin Web3 wallet, Xverse.
Step 1: Set Up the Xverse Wallet
Xverse Wallet is a non-custodial Bitcoin wallet that supports the Stacks protocol, making it an excellent choice for accessing DeFi applications on Bitcoin. Follow these steps to set up your Xverse wallet:
- Download Xverse: Go to the Xverse website and download the wallet for your preferred platform (available for mobile and web).
- Create a new wallet: Open the app and select “Create New Wallet.” Secure your wallet by noting down the provided seed phrase in a safe place. This phrase is crucial for recovering your wallet if you ever lose access.
- Fund your wallet with BTC: Transfer some Bitcoin to your Xverse wallet. This BTC will later be used for trading on ALEX. To do this, copy your wallet’s Bitcoin address and send Bitcoin from another wallet or exchange.
Step 2: Connect Xverse to ALEX
Once your Xverse wallet is set up and funded, you’ll need to connect it to ALEX to start trading.
- Visit the ALEX platform: Open the ALEX website (make sure it’s the official one).
- Connect your wallet: On the ALEXGO.IO dApp, select the option to connect your wallet. Choose Xverse from the list of compatible wallets and authorize the connection. You’ll likely need to approve the connection on your Xverse wallet app.
Step 3: Converting BTC to aBTC via a cross-chain bridge
ALEX operates on the Stacks layer, which requires BTC to be represented as tokenized Bitcoin. An example of that would be the token aBTC. To trade Bitcoin on ALEX, you need to convert your BTC to aBTC using a cross-chain bridge.
- Open the bridge: Navigate to the bridge function on the ALEX platform.
- Transfer BTC to aBTC: Follow the prompts to send your BTC and receive an equivalent amount in aBTC. Ensure you confirm the transaction in your Xverse wallet.
- Wait for confirmation: The conversion may take a few minutes, depending on network congestion. Once the process is complete, you’ll see aBTC in your ALEX account.
Step 4: Executing a trade
Now that you have aBTC, you can use it to trade on ALEX’s decentralized exchange.
- Choose your trading pair: On the ALEX trading interface, select the trading pair you’re interested in. For example, you might choose aBTC/STX.
- Set trade parameters: Enter the amount you want to buy or sell, along with the price. ALEX allows limit and market orders, so you can choose your preferred order type.
- Confirm the trade: Review the trade details and confirm the transaction. Your Xverse wallet will prompt you to approve the trade.
- Wait for settlement: After confirmation, the trade will be processed on-chain. Once completed, you’ll see your new asset balance in ALEX and Xverse.
Step 5: Withdraw aBTC to BTC
If you want to convert your aBTC back to BTC, you can use the bridge again.
- Access the bridge: Navigate back to the bridge on the ALEX platform.
- Convert aBTC to BTC: Follow the prompts to convert aBTC back to BTC, sending it directly to your Xverse wallet.
- Confirm transaction: Approve the transaction in Xverse, and your BTC will be back in your wallet after network confirmation.
Wrapping up
Decentralized Bitcoin exchanges provide a powerful way to engage in DeFi using Bitcoin. As Bitcoin’s DeFi ecosystem continues to grow, Bitcoin DEXs offer a unique opportunity for users who value decentralization, security, and privacy.
