How To Safely Execute a Trade in Web 3.0

Web 3.0 is generally characterized as a version of the internet that is decentralized, transparent, and secure. Today, the most important part of Web 3.0 is decentralized finance (DeFi), it has become the first point of contact for people new to the idea of a decentralized internet.

The interesting thing about Web 3.0 is that the burden of security and safety lies on the end user. Of course, that's a good hedge against malevolent centralized actors, but it also means that end users have to be extremely careful as well.

Over the past few years, the spate of cyber attacks in Web 3.0 has only increased. Asides from the threats of external mischievous actors, there's also the possibility of users mistakenly trading incorrectly and losing their funds themselves.

Web 3.0 protocols are generally easy to understand, but they tend to be unfamiliar to first-time users. Those first-time users can make grievous mistakes that could lead to loss of funds, or even general losses in terms of profits.

The good news is that these sorts of mistakes can be avoided. If you're new to trading on Web 3.0, here's your short guideline on how to execute a trade safely.

Know What You Want To Do

Users who want to use a Web 2.0 app like Twitter or Facebook don't need a tutorial to do it. They can simply download the app, and find their way about it intuitively.

Here's the thing; that sort of approach would hardly work with Web 3.0 DeFi apps. The first reason is that the stakes are simply too high. A misstep could result in a lot of money being lost to the ether.

The second reason is that Web 3.0 dApps, unfortunately, have a user experience problem. This means that the apps are not designed to be as intuitive as possible for users. Now, a part of this is due to design decisions, but a lot of it is also due to the nature of crypto in general.

So before trying to execute a trade users need to know exactly what they want to do. It doesn't matter whether they are trying to provide liquidity to a pool or bridge their tokens. Those steps must be as clear as possible in the user's mind before the first step is taken.

Thankfully, there are a lot of step-by-step tutorials for most trade formats on crypto. Therefore users have no shortage of sources to get an idea of what they are meant to do.

Understand the Risks

Risks are the language of DeFi. Every trade has its risks, and some risks are due to the nature of the blockchain entirely. Before executing a contract or a trade on the blockchain, users must understand what risks they are carrying.

They must also know that the scope of risks in DeFi expands beyond mere profit and loss terms. Users can also experience a loss due to external conditions such as market volatility.

For example, users can experience something called slippage. Slippage is a loss effect that is experienced when the price at which a trade is expected to be executed is different from the one at which it was executed.

For example, if 1 ETH is worth $1,000 by the start of the buy order for ETH, and by the time the trade was eventually executed 1 ETH was worth $1,100 then the user would have experienced a slippage loss of about $100.

Slippage loss is a really common occurrence in crypto. This is due to the volatility in the prices of crypto assets. Sometimes it could also be due to systemic problems like shallow pools — that is, DEXes that don't have enough assets to cover a trade.

Here are some ways that users can reduce their exposure to these slippage risks. One way to limit that exposure is to make sure to always make use of limit orders, instead of market orders. Market orders are orders carried out against the market value of an asset as provided by an oracle. Limit orders, on the other hand, will only be executed at the requested price.

Another way to curb this problem is by using a smart order router. There are some order routers, like DSOR - the smartest algorithmic aggregator on Radix Ecosystem, that have algorithmic pools that make it difficult for slippages to happen. The goal of these smart routers, in essence, is to browse through all the possible exchanges and find the optimal channel for trades to be executed through. This sort of approach automates decision-making for users and ensures they aren't leaving any money on the table through their trade(s).

One more risk that users may underestimate is something called impermanent loss. Impermanent loss occurs when a trader loses more money than he would have done if they'd simply held on to his coins.

Since the price of crypto assets is constantly rising and falling, some users may make more money from holding their assets than by putting them to work in DeFi. The difference between the amount of money a user would have made while holding their coin and the one made while locking it up is what's referred to as an impermanent loss. The loss in this case is realized and becomes permanent when a trader withdraws his liquidity from the pool.

The best way to avoid impermanent loss is to make use of stablecoins while trading. These coins always retain their value and will not be swayed by other vicissitudes of the market.

Impermanent loss occurs when traders use a DEX to buy one asset with another asset. For example, if a trader buys Ethereum using USDC, then the trader is exposed to the price movements of both assets. If the price of ETH falls relative to USDC, the trader's profit from the trade will decrease or even become a loss.

These are just two of the market-related risks that users have to be careful about while trading on Web 3.0. There are also other important risks like false smart contracts and even weapons-grade social engineering.

Double Check Every Step

This is perhaps the most important precaution to take when trading on Web 3.0. Every user of Web 3.0 must have a healthy distrust both of themselves and of the protocol they are interacting with. As a matter of principle, every step when trading on Web 3.0 must be scrutinized twice to avoid mistakes.

Conclusion

Malevolent people can be found in crypto — just like every other industry in the world. That's why it's important not to be too trusty when interacting with external links and other such things.

Users who want to keep their assets safe must be very careful when executing trades. That's the barest minimum got staying safe in Web 3.0.

As long as users and traders follow the three outlined steps above, they should be able to safely execute trades in Web 3.0.