Token Swaps
Understanding decentralized token swapping on Ethereum and how DEX aggregators find the best prices.
What is a Token Swap?
A token swap is the exchange of one cryptocurrency token for another without using traditional centralized exchanges. On Ethereum, you can swap ETH for any ERC-20 token (or between any two ERC-20 tokens) directly through decentralized exchanges (DEXs) and automated market makers (AMMs).
Unlike traditional trading where buyers and sellers create order books, most Ethereum token swaps use liquidity pools where users trade against smart contracts that hold reserves of both tokens. Prices are determined algorithmically based on the ratio of tokens in the pool.
Key Benefit: No centralized intermediary, no registration required. Just connect your wallet and swap instantly.
How Token Swaps Work
Step-by-Step Swap Process
- 1.You specify which token you want to swap (e.g., ETH) and which token you want to receive (e.g., USDC)
- 2.The DEX or aggregator queries multiple liquidity sources to find the best price
- 3.You approve the DEX to spend your tokens (one-time approval per token)
- 4.You confirm the swap transaction, paying the quoted amount plus gas fees
- 5.The smart contract executes the swap, sending you the received tokens
- 6.Time: Swap completes when your transaction is confirmed (~12-30 seconds on Ethereum)
Automated Market Makers (AMMs)
Most Ethereum swaps use AMM protocols like Uniswap, SushiSwap, and Curve. These protocols use mathematical formulas to price tokens based on the ratio in liquidity pools.
Example: A Uniswap ETH/USDC pool with 100 ETH and 300,000 USDC values ETH at $3,000. As you buy ETH, the pool's ratio changes and the price adjusts automatically.
DEX Aggregators: Getting the Best Price
DEX aggregators like 0x Protocol, 1inch, and Matcha scan multiple decentralized exchanges simultaneously to find you the best price for your swap. They can even split your order across multiple DEXs to optimize pricing.
Without Aggregator
- Check each DEX manually for prices
- May get suboptimal prices
- Time-consuming and inefficient
- Higher slippage on large trades
With Aggregator
- Automatically finds best prices across all DEXs
- Can split orders for better execution
- Single transaction to execute
- Reduced slippage on large orders
How Blanket Uses 0x Protocol
Blanket integrates with 0x Protocol, a leading DEX aggregator that sources liquidity from dozens of DEXs including Uniswap, Curve, Balancer, and more. When you request a swap quote, 0x:
- • Queries prices from all available liquidity sources
- • Calculates the optimal routing for your specific trade
- • Provides guaranteed pricing with slippage protection
- • Executes through a single, gas-optimized transaction
Swap Costs and Fees
Network Fees (Gas)
On Ethereum mainnet, every swap requires paying Ethereum gas fees.
Protocol Fees
Most DEXs charge a small fee (typically 0.01% to 0.3%) that goes to liquidity providers. This fee is already included in the quoted price you see.
Slippage
Slippage is the difference between the expected price and the execution price. It occurs because prices can change between when you submit a transaction and when it's confirmed on-chain.
Example: You expect to receive 3,000 USDC for 1 ETH, but due to 1% slippage, you receive 2,970 USDC. Most interfaces let you set a maximum slippage tolerance (e.g., 0.5% or 1%).
Key Concepts for Token Swapping
Liquidity
The amount of tokens available in a pool. Higher liquidity means better prices and lower slippage for your swaps.
Price Impact
How much your trade affects the token price. Large trades relative to pool size have higher price impact.
Token Approval
A one-time transaction allowing a DEX to spend your tokens. Required before your first swap of each token.
MEV Protection
Protection against bots that try to profit by front-running your transaction. Some aggregators offer built-in MEV protection.
Route Optimization
Finding the best path for your swap, which might involve trading through intermediate tokens (e.g., ETH → USDC → DAI).
Minimum Received
The minimum amount of tokens you'll accept. If slippage exceeds your tolerance, the transaction reverts.
Best Practices for Token Swapping
Check Multiple Sources
Compare prices across different aggregators and DEXs to ensure you're getting the best rate.
Set Appropriate Slippage
Use 0.5-1% slippage for liquid pairs, 1-3% for less liquid tokens. Higher slippage needed during volatile markets.
Verify Token Addresses
Always verify you're swapping the correct token. Scammers create fake tokens with similar names.
Consider Gas Fees
For small swaps, gas fees can be a significant percentage. Consider batching trades or using L2 networks.
Be Patient During High Congestion
During network congestion, consider waiting for lower gas prices or using a higher gas setting for faster execution.
L1 vs L2: Where to Swap?
Understanding the difference between Layer 1 (L1) and Layer 2 (L2) networks can help you save on gas fees and improve your swapping experience.
Layer 1 Networks
The main blockchain networks that process and finalize all transactions independently.
Examples:
- • Ethereum Mainnet
Characteristics:
- ✓ Maximum security and decentralization
- ✓ Native asset liquidity
- ✗ Higher gas fees ($5–$50+ per swap)
- ✗ Slower transaction times
Best for: Large trades, maximum security, holding long-term assets
Layer 2 Networks
Scaling solutions built on top of L1 networks that process transactions off-chain and batch them for L1 settlement.
Examples:
- • Optimism (Optimistic Rollup)
- • Arbitrum (Optimistic Rollup)
- • Base (Optimistic Rollup)
- • Layer 2 & Scaling Networks (Rollups and Sidechains)
Characteristics:
- ✓ Much lower gas fees ($0.01–$0.05 per swap)
- ✓ Faster transactions (1-2 seconds)
- ✓ Same Ethereum tooling and wallets
- ✗ Need to bridge assets from L1
Best for: Frequent trading, small transactions, testing, DeFi interactions
How to Choose?
Use L1 (Ethereum Mainnet) when:
- • Swapping large amounts ($10,000+)
- • Maximum security is critical
- • Trading tokens only on mainnet
- • Gas fees are <1% of trade value
Use L2 when:
- • Making frequent or small trades
- • Testing strategies or protocols
- • Participating in DeFi regularly
- • Want near-instant confirmations
Remember:
- • You'll need to bridge assets to use L2
- • Some tokens only exist on specific networks
- • L2 networks inherit Ethereum's security
- • Bridging back to L1 takes time and costs gas