Uniswap is a decentralized crypto exchange that runs on the Ethereum blockchain and facilitates swapping tokens between traders.
As the pioneer in decentralized finance (DeFi), Uniswap aims to revolutionize the old DEX by providing an automated liquidity protocol.
What Is Uniswap?
Uniswap is an open-source protocol that was built on the Ethereum blockchain in the year 2018. The fact that it is decentralized means that it is neither operated nor owned by just one entity.
What sets Uniswap apart from the traditional DEX is that it does not need an order book to manage the prices of various tokens. It uses an equation where liquidity within the pool remains constant at any given time.
For Uniswap to work, liquidity providers must form a liquidity pool that can efficiently sustain trading and lending in a decentralized manner.
This includes but is not limited to swapping and listing ERC-20 tokens without needing an order book.
How Uniswap Works
Uniswap runs on the “Exchange” and “Factory” contracts. These computer programs have been designed to perform specific functions only when certain conditions have been met.
That said, the factory contract adds new tokens to the platform, while the exchange contract is responsible for all token swaps or facilitates “trades.”
Via the Uniswap V.2 platform, which is the updated form Uniswap platform, one can easily swap an ERC20-based token with another token.
Automated Liquidity Protocol
As mentioned earlier, centralized exchanges face a liquidity problem. Uniswap, however, solves this problem by coming up with an automated liquidity protocol. This works by providing incentives to the users in the platform to make them liquidity providers in exchange.
The platform users create a fund that executes all trades on the platform. Every token has a specific pool to which users contribute their money, and a computer-generated math algorithm determines the token prices.
This way, buyers and sellers can efficiently execute any trade as long as there is enough liquidity in that particular pool, eliminating the need to patiently wait for the opposite party to come so that you can finalize a trade.
Arbitrage
Arbitrage traders find the price differences across the available exchanges and use that to secure a profit.
On Uniswap, arbitrage traders find underpriced or overpriced tokens relative to the average market price and then sell or buy them accordingly.
They continually do this until all the token prices on all exchanges balance and no more profit can be made. This relationship between arbitrage traders and market makers ensures Uniswap token prices balance with other markets’ prices.
How Do You Use Uniswap?
It’s easy to use Uniswap, but first, you must have created an ERC-20-supported wallet such as Coinbase wallet, walletConnect, Formatic, MetaMask, or Portis.
Once you have one, add ether to it so that you can take part in trading on Uniswap and be able to pay for Ethereum transaction fees rather, known as gas. The transaction fees vary following the number of people using the platform.
Three choices are provided to you by ERC-20 compatible wallets whenever you choose to make a payment on the Ethereum blockchain. These choices are: slow, medium, and fast. Your choice determines how fast the Ethereum network miners process your transaction.
Uniswap’s UNI Token
Uniswap’s UNI token was first developed in September 2020 to ensure users are not defecting to the rival DEX SushiSwap. Generally, it’s referred to as a governance token.
Through it, token holders can vote on changes they wish to be implemented on the platform, give their opinion on fee structure, and suggest how minted tokens can be distributed to developers and the community.
Closing Thoughts
Swapping Ethereum-based tokens can now be done easily and effortlessly, thanks to Uniswap. The team has devised a solution that the whole cryptocurrency community has needed for a long time.
Uniswaps’s usage has elevated to a new level since users are more confident due to Uniswap’s automated liquidity protocol.