Decentralized Exchanges in DeFi

Let’s move on to decentralized exchanges. Exchanges are a fundamental element of the entire cryptocurrency ecosystem. Everything began with the creation of centralized exchanges, which made it possible to buy Bitcoin with dollars or stablecoins. Over time, more trading pairs appeared, allowing users to buy Ethereum and many other altcoins. Today, major players such as Binance, Bybit, and Coinbase dominate the centralized exchange market and allow users to purchase a wide range of cryptocurrencies.

How Centralized Exchanges Work

You create an account, complete verification, and gain access to buying assets. Then you can withdraw them to your wallet if you choose. Trading on centralized exchanges takes place through order books — lists of buy and sell orders.

For example, if you want to buy one Bitcoin at thirty-nine thousand dollars, you place a buy order. If someone places a matching sell order at the same price, the orders are matched and the trade is executed.

Thus, all centralized exchanges operate using this order book mechanism.

How Decentralized Exchanges Work

Decentralized exchanges operate using liquidity pools. This is a very important concept that needs to be understood, and I will explain it in detail in the next section.

In the case of centralized exchanges, the platform itself keeps all the fees.
But on decentralized exchanges, fees are distributed among the users who provided liquidity.

As a reminder, in the decentralized finance ecosystem all interaction takes place between users. There are no central authorities.

If I want to swap Ethereum for USDT, I do it through a decentralized exchange where other users have supplied assets into the liquidity pool. For example, if you hold Ethereum and USDT, you can provide liquidity to a decentralized exchange, enabling other people to swap ETH for USDT. For every swap, you earn a small percentage of the trading fee. There are many such trading pairs.

You can create a pair like ETH–BTC or any other combination with various altcoins. The higher the trading volume in your chosen pair, the higher your earnings, because you receive a portion of the fee from every swap within that pair.

This is why decentralized exchanges do not require verification or personal identification. You simply visit the platform, connect your wallet, and select a trading pair.

Example of a Swap

If I buy one ETH for one thousand dollars, I will pay a 0.3% fee.
This fee is then distributed among all liquidity providers in that trading pair.

Liquidity pools can be very large: in some trading pairs liquidity reaches hundreds of millions of dollars.

Naturally, if you contribute one thousand dollars to a pool with enormous liquidity, your share will be extremely small. As a result, your fee income will also be small. Therefore, it is more profitable to choose pairs where trading volume is high, but total liquidity is relatively low.

Again, I go over this in detail in the module, where I explain how to choose the right trading pairs to maximize your yield using top passive-income tools.

Uniswap Example

Here is what the interface of the Uniswap exchange looks like. I want to sell one ETH and receive stablecoins. In this case, the swap is executed fully decentralized and autonomous. I use the liquidity of the ETH–USDT pool, exchange ETH for stablecoins, pay a fee, and this fee is distributed among all liquidity providers in proportion to their share of the pool.

This is what the interface looks like from the liquidity provider’s perspective — the person who supplied assets to the trading pair. In this example, the liquidity belongs to the ETH–BTC pair. There is also a field showing incoming earnings: for every swap within the ETH–BTC trading pair, I receive yield in ETH and BTC.

These are not internal tokens and not worthless assets — the rewards are real coins.

So if the trading pair is ETH–BTC, the rewards are paid specifically in Ethereum and Bitcoin. I can claim these fees in a single transaction and then use them however I want: reinvest, swap into stablecoins, or withdraw to another wallet.

Key Parameters for High Yield

This is how earning through decentralized exchanges works. And the key parameters for generating high yield on a trading pair are:

• Trading volume
• Total liquidity in the pool
• The ratio of volume to liquidity

The higher the trading volume, the higher the income for those who provide liquidity to that trading pair.

What Assets Should You Use for Liquidity?

It is also recommended — and ideally required — to provide liquidity only to pairs made up of assets that are already in your portfolio.

If your portfolio includes Bitcoin, Ethereum, and stablecoins, then you should only provide liquidity to pairs involving Bitcoin, Ethereum, and stablecoins.

You should not buy an asset solely because the pair shows high volume, high yield, or large fees.
Use only the assets you already own and open trading pairs with them.

However, this is not as simple as it seems. You need to understand:

• how liquidity works,
• how fees are distributed,
• and which blockchain offers the best conditions for providing liquidity to a specific trading pair.

Decentralized exchanges exist on different blockchains, and each blockchain has its own yield levels, trading volumes, and fee structures. I explain all of this in detail in the module: how to choose the right pairs, how to manage positions efficiently, and how to maximize yield using decentralized exchanges.

Combining Tools for Advanced Strategies

In addition, this is only one fundamental tool for earning. All these trading pairs and exchanges can be combined with other instruments — for example, lending markets. By using them together, you can build complex strategies that offer higher returns but also come with higher risks.

These materials are created for educational purposes only and do not constitute financial advice.