Uniswap — Decentralized Exchange 101
Created in 2018, Uniswap is currently one of the largest decentralized exchanges in the crypto world. It’s unicity, pardon the pun, comes from it’s outstanding performance compared to the leading centralized exchanges in terms of funds turnover and popularity. It’s ability to exchange tokens in a single click without any restrictions or KYC requirements makes Uniswap one of the most promising and evolving directions in the development of decentralized finance (DeFi) and the world of cryptocurrencies.
In today’s article, we will take a look at Uniswap’s structure, examine its features and capabilities, and describe the steps required to start trading tokens on this forward-thinking decentralized exchange.
Uniswap’s key features
Uniswap is a decentralized exchange facilitating ERC20 tokens trading executed via the automated market maker mechanism (AMM).
Decentralized exchanges allow trading the tokens by connecting Web 3.0 wallets between them, which eliminates the need to provide personal data and maintaining the user’s privacy
Uniswap offers a liquidity provision mechanism which allows tokens to be exchanged automatically by sending funds to a specific smart contract address making the essence of the AMM mechanism and its difference from the Order Books method used by centralized exchanges. The liquidity required to enable an instant exchange is provided by so-called liquidity pools that are formed by liquidity providers. For this reason, there are no orders of any kind on the exchange while the trading is done instantly.
In order to provide liquidity users need to lock their funds at a certain ratio, receiving a reward of 0.3% from each ETH trade and 0.6% from ERC-20 tokens exchange. The amount of remuneration is formed from commissions paid by users and later distributed between all participants according to the amount of locked funds. The larger the liquidity pool the less each transaction impacts the price.
Uniswap V1 was the only version of the protocol up until spring 2020. The developers released a second version in May that included a number of significant elaborations: improved oracles, simplified UX, non-standard tokens support, token borrowing features, and more.
We’ve reviewed a number of Uniswap user interfaces in one of our previous articles and we were highly impressed by its advantages in comparison to to its competitors. Their smooth user experience provides the ability to add funds to the pool or exchange tokens without accessing the Uniswap interface itself, making it very intuitive for every type of user.
1.Connecting a wallet
As mentioned before, connecting a Web 3.0 wallet is necessary to use Uniswap. To do so you need to click “Connect to wallet” and choose the most convenient option.
It is worth remembering that in order to trade on the exchange, it is necessary to pay gas fees. Since Uniswap is a decentralized exchange that operates on smart contracts, it is also necessary to consider that more gas may be required for some particular transactions, and therefore the platform fees may be higher than Ethereum’s network fees.
For this reason, you need to be aware of the fees and the amount of ETH required for the transactions you plan to make. If you don’t have enough ETH in your account you will need to either top up your wallet or wait for the transaction fees to drop. You can access information about the cost of gas by visiting ETH Gas Station or Etherscan.
After connecting a wallet, you need to select a pair for exchange and click “Swap”. Second step is that you need to provide gas to pay the fee and confirm the transaction using the connected wallet.
In the updated version of Uniswap V2, it is now possible to pool any ERC20 token with any other ERC20 token any available tokens. Having direct ERC20/ERC20 pairs can also improve prices because routing through ETH for a swap between two other assets (for instance, DAI/USDC) involves paying fees and slippage on two separate pairs instead of one.
5.Smart contract address search
If the pair you want to exchange is not on the list, you can add a token using a smart contract address. To do so, visit Coingecko or Coinmarketcap and select the desired token, then copy the corresponding smart contract address and enter it in the search field on Uniswap.
Since Uniswap is a decentralized exchange, anyone can add “imposter” tokens, making them visually similar to the original ones. This is a solid reason to use contract addresses when adding new coins, guarding you from the scammers.
Advanced transaction settings
You can access additional settings by pressing the settings symbol:
- Slippage tolerance. Slippage occurs due to changes in asset values. This is the difference between the price at which the transaction was confirmed and the price at which the last order was executed. Trending tokens are likely to be in demand, and therefore traders may have to increase this parameter in order to process the transactions faster.
- Transaction deadline. The limit after which the transaction can no longer be executed.
Unless you are an experienced user, we suggest you to leave the Interface Settings unchanged.
Clicking on “View pair analytics” will take you to Uniswap Info, providing you with comprehensive information on all tokens and exchange pairs available on the platform.
At the time of writing, the total amount of funds locked on the Uniswap decentralized exchange is $3.9 billion which makes it the second DEX behind Curve Finance ($4.2B).
In September 2020, the DEX developers from Uniswap launched their own internal UNI management token and airdropped 400 UNI to every account that used the platform prior to September 1, 2020. You can check whether you are eligible for tokens by entering your ETH address in a special field provided on the exchange’s website.
Through its advantages, Uniswap does not charge for listing new coins on its platform and offers swift swaps and some of the lowest fees among the decentralized exchanges. Most of the projects in the Ethereum network launched in the DeFi sector are listed on the Uniswap exchange, which speaks to the demand and popularity of the platform, making it an essential to every DeFi enthusiast