Why Do DEXs Require Token Approvals?

Introduction

When using decentralized exchanges (DEXs) like Uniswap for the first time, you may encounter an "approve" step before executing a swap. This often raises questions: Why can't I just transfer tokens directly? What’s the purpose of approval?

This article explores the rationale behind token approvals in DEX transactions and how they enhance security and functionality.

ERC-20 Protocol Standards

Ethereum-based tokens follow the ERC-20 standard, which defines key methods for token interactions:

function balanceOf(address _owner) // Check balance
function transfer(address _to, uint256 _value) // Direct transfer
function transferFrom(address _from, address _to, uint256 _value) // Delegated transfer
function approve(address _spender, uint256 _value) // Grant spending rights
function allowance(address _owner, address _spender) // Check approved amount

event Transfer(address indexed _from, address indexed _to, uint256 _value)
event Approval(address indexed _owner, address indexed _spender, uint256 _value)

Key Components Explained

1. transfer: Allows users to send tokens directly to another address.
2. transferFrom: Enables a third party (e.g., a DEX contract) to move tokens on behalf of the owner.
3. approve: Grants permission to a spender (e.g., Uniswap) to withdraw tokens up to a specified limit.

How Token Approvals Work in DEXs

Step-by-Step Process

1. User Approval:

   • The user approves a DEX contract (e.g., Uniswap) to access their tokens via the approve method.
   • Example: Alice approves Uniswap to spend up to 10 USDT.

2. Swap Execution:

   • When Alice swaps USDT for USDC, Uniswap calls transferFrom to deduct USDT from her wallet and credits her with USDC.

Why This Two-Step System?

• Security: Prevents unauthorized transfers. Tokens can’t be moved without explicit user consent.
• Flexibility: Allows contracts to manage tokens dynamically (e.g., multi-step swaps).

Technical Deep Dive: OpenZeppelin’s ERC-20 Implementation

// Storage mappings
mapping (address => uint256) private _balances; // Tracks token balances
mapping (address => mapping (address => uint256)) private _allowed; // Tracks approvals

// Check approved amount
function allowance(address owner, address spender) public view returns (uint256) {
    return _allowed[owner][spender];
}

// Transfer tokens (user-initiated)
function transfer(address to, uint256 value) public returns (bool) {
    require(value <= _balances[msg.sender]);
    _balances[msg.sender] -= value;
    _balances[to] += value;
    emit Transfer(msg.sender, to, value);
    return true;
}

// Delegated transfer (contract-initiated)
function transferFrom(address from, address to, uint256 value) public returns (bool) {
    require(value <= _balances[from]);
    require(value <= _allowed[from][msg.sender]);
    _balances[from] -= value;
    _balances[to] += value;
    _allowed[from][msg.sender] -= value;
    emit Transfer(from, to, value);
    return true;
}

// Grant approval
function approve(address spender, uint256 value) public returns (bool) {
    _allowed[msg.sender][spender] = value;
    emit Approval(msg.sender, spender, value);
    return true;
}

Real-World Use Case: DEX Swaps

Problem Without Approvals

If Alice sends 1 USDT to a DEX contract via transfer, the DEX won’t automatically know the transaction occurred (ERC-20 transfers don’t notify recipients). This could leave swaps incomplete.

Solution With Approvals

1. Alice approves the DEX to spend her USDT.
2. She calls the DEX’s swap function, which internally uses transferFrom to pull USDT from her wallet.
3. The DEX confirms receipt instantly and releases USDC.

👉 Learn more about secure DeFi transactions

Frontend Implementation (Pseudocode)

// Variables
const from = userAddress;
const to = recipientAddress;
const SWAP = dexContractAddress;
const USDT = tokenContractAddress;
const amount = transferQuantity;

// Check existing allowance
const allowed = USDT.allowance(from, SWAP);

if (allowed < amount) {
    // Step 1: Approve DEX to spend tokens
    await USDT.approve(SWAP, amount);
    // Step 2: Execute swap
    await SWAP.swap(from, to, amount);
} else {
    // Proceed directly to swap
    await SWAP.swap(from, to, amount);
}

FAQ Section

Q1: Why can’t DEXs use transfer instead of approve + transferFrom?

A: transfer doesn’t allow contracts to autonomously manage tokens. Approvals enable automated workflows (e.g., instant swaps).

Q2: Are approvals risky?

A: They’re safe if granted to reputable contracts. Always revoke unused approvals via tools like Etherscan.

Q3: Do approvals cost gas?

A: Yes. Both approve and transferFrom incur gas fees.

Q4: Can I set an unlimited approval?

A: Yes, but it’s safer to approve only the amount needed for a transaction.

👉 Explore advanced DeFi strategies

Conclusion

Token approvals are a cornerstone of DeFi functionality, enabling secure, trustless interactions between users and smart contracts. By understanding the ERC-20 methods behind approvals, users can navigate DEXs with confidence and optimize their transaction workflows.