The inception of the Ethereum blockchain in 2015 led to a rise in a whole new world of opportunities. A new class of projects arose called DeFi with their native tokens. These tokens were the most vital tools powering the DeFi projects.
However, unlike standard financial assets, these digital tokens required special exchanges where investors could easily buy and sell. That’s when the concept of decentralized exchanges arose. Decentralized exchanges are autonomous tools created to ease buying and selling DeFi-based tokens. One of the most popular decentralized exchanges is UniSwap.
Defining Uniswap: History?
By simple definition, Uniswap is a decentralized crypto exchange initially created to serve Ethereum-focused tokens. Generally, the DEX platform facilitates the completion of automated distributed transactions leveraging blockchain networks.
Uniswap is one of if not the largest DEX platforms in the crypto landscape today. The main idea behind its fashioning is to allow anyone to quickly sell ERC-20 tokens without getting connected to centralized exchange platforms.
This platform was founded in 2018, and by 2022 it had attained massive daily transaction volumes, even challenging some top crypto exchange platforms. It is mainly an open-source Ethereum-based protocol mainly designed to help in the transfer of ERC-20 tokens.
Essentially, Uniswap is built to offer decentralized trades, which are quite the opposite of centralized trades. Centralized exchanges leverage order books to match buyer and seller orders. Decentralized exchanges leverage an automated market-making system which consists of liquidity pools to ease the transfer of assets.
How Does UniSwap Work?
As a decentralized exchange platform, Uniswap leverages the concept of automated market-making to ensure there is always enough liquidity in the markets. UniSwap is popularly known as an automated market maker.
An automated market maker (AMM) is a digital tool designed to help in the trustless transfer of crypto assets. Uniswap strictly adheres to the founding principles of an AMM.
The platform allows anyone to trigger crypto token transactions from their wallets. As such, it ensures that the custody of the investors will always remain with the owners. Essentially, Uniswap combines two types of smart contracts: Factory and exchange smart contracts.
- The factory smart contract helps add and list new tokens within the DEX.
- The ‘exchange smart contract’ is designed to help swap crypto tokens easily.
Uniswap operates by using unique systems called liquidity pools. Liquidity pools are smart contracts that contain two different assets at differing ratios. For instance, one of Uniswaps liquidity pools contains two assets, USDC/USDT. To purchase one asset, you must add another asset to the pool. For instance, if you want to buy USDC in the pool, you must deposit some USDT.
The Uniswap liquidity pools are standardized with a formula X*Y=K where X is the first asset (USDC), Y is the second asset (USDT), and K represents a fixed ratio between the assets.
When you deposit USDT to withdraw USDC, the amount of the latter reduces in the markets. To keep the ratio constant, one asset will have to gain price. These minor price distinctions give great arbitrage opportunities for investors.
UniSwap Liquidity Provision
The operation of Uniswap, as mentioned, depends vastly on the efficiency afforded by its liquidity pools. The liquidity pools help ensure there is always enough liquidity in the DEX for traders to enjoy easy transfer of tokens.
Uniswap liquidity pools rely on people called liquidity providers to help bring enough token liquidity into the markets. So, liquidity collateralized their dormant tokens on the liquidity pools in the ratio K given above. For instance, the USDC? The USDT ratio is 1:1. In other pools, the ratio will change depending on the price difference.
Therefore, the persons called liquidity providers must all add some amount of the tokens in the pools. Once you deposit the required assets, you will receive LP tokens indicating your pool share. By providing liquidity, the investor earns some amount of reward.
But how can you add liquidity to Uniswap’s pools? Here are a few critical steps for adding liquidity in a USDC/ETH pool;
- Have your tokens in your web3 wallet, mainly Metamask. However, Uniswap accepts many other wallets.
- Connect your Metamask wallet to your Uniswap account
- Navigate to the pool section and identify the pool (USDC/ETH)
- Set the amount of USDC/ETH you want to add to the pool. If you fill up the USDC section, it will autonomously calculate the amount of ETH needed and vice versa.
- Click approve, and approve the transaction even from Metamask.
- Supply the required liquidity
What is UNI Token and Its Role?
At the very core of the Uniswap network is a native token called UNI. UNI is by itself an ERC-20 token based on the Ethereum blockchain network. This token helps power the entire UniSwap network and ensure the efficiency of service delivery within the network.
The primary role of the UNI token is the governance of the platform. Essentially the UNI token helps in the governance tasks associated with Uniswap. Holders of this token can participate in governance through voting to decide the direction of the network.
There’s a total supply of 1 billion UNI tokens. When writing this report, there is a circulating supply of 762 million, each trading at $6.13. The current market cap is about $4.67 billion.
How Can I Use Uniswap?
The Uniswap network is specially designed for swap-related tasks. It should allow investors to swap one token for another quickly. This means that investors can at any time of the day access UniSwaps services and complete any of their trades with utmost ease.
However, many investors in the DeFi landscape would want to know how to swap tokens on Uniswap. Here are a few key steps;
Step 1: Link a Crypto Wallet
The first step to using Uniswap for any service is connecting your crypto wallet with the DEX. The Uniswap network supports several crypto wallets, including Metamask, Coinbase, and WalletConnect. Each of the wallets is capable of holding ERC-20 tokens. The main aim of linking the wallets you Uniswap is to allow this DEX to interact directly with your wallets.
Connecting the wallet is quite simple and involves the following three steps;
- Navigate to the Connect Wallet section of Uniswap
- Chose the wallet to connect
- Confirm connection
Step 2: Ensure you Have the Token
Ensure you have enough of the tokens you want to swap out in your wallet. In our case, we want to Swap out Ethereum for USDC. Therefore, make sure you have some amount of ETH in your wallet.
Step 3: Access the Swap Section
At this very point, you can initiate all your trades from the wallets. Click the Swap section in Uniswap. A new page opens, requiring the details of what assets you are selling. In that section, select the asset you want to swap out. At the moment, Uniswap supports many assets for swapping out. The tokens include ETH, USDC, USDT, DAI, WBTC, and WETH.
Just below the swap-out button, you also need to fill up the swap-in token (the token you want to purchase). There are already hundreds of supported tokens on Uniswap, which you can easily purchase. Select the one token you want to purchase, in this case, UniSwap.
Once you identify your two assets, you need to set up the amount you are willing to spend purchasing the new token. For instance, if you want to buy USDC using ETH, input ETH in the higher swap-out button and USDC in the swap-in button. State the amount of ETH you are willing to spend.
Step 4: Trade
The fourth step in this process is simply confirming all your trades. This could involve clicking the swap button and confirming via your wallet.
What Services Does Uniswap Offer?
Swap
As already mentioned, Uniswap is mainly a decentralized exchange platform. As such, its primary role is offering swapping services for DeFi-related tokens. The platform currently allows investors to swap out tokens from the many already supported assets.
Create Liquidity Pools
Another service afforded by Uniswap is creating liquidity pools. Creating a liquidity pool involves setting up your pool consisting of two tokens.
Supply Liquidity
Another service provided by the Uniswap network is liquidity provision. Liquidity provision allows investors to use their dormant assets to earn passive incomes. They add the assets to liquidity pools.
Pros and Cons Associated with UniSwap
As a decentralized exchange platform, Uniswap has many pros and cons that may be good and detrimental to investors. Among the known benefits of Uniswap include the following;
- Swap ERC-20 tokens
- User-friendly design. Uniswap offers a highly user-friendly interface, enabling anyone, rookie or expert, to transact easily.
- Earn crypto with liquidity mining. As already mentioned, Uniswap has an excellent rewarding option leveraging liquidity mining.
- No registration is required. The platform only requires a direct link to your wallet to operate.
- Crypto wallet support. The platform supports multiple cryptocurrency wallets giving options to investors.
- The platform supports a wide range of Ethereum-based ERC-20 assets.
However, while UniSwap is quite beneficial, it has its downside. The platform’s fees have always been vastly affected by Ethereum gas charges. Moreover, the platform does not require any KYC.
What is UniSwap’s Biggest Competitor?
Of course, many decentralized exchange platforms exist in the crypto markets today. Many operate in different blockchain networks, hence not Uniswap’s direct competition. However, we will highlight a few crypto DEXes operating in and out of the Ethereum network. Among them include;
- Sushiswap — The biggest direct competitor for Ethereum at the moment is Sushiswap. Barely two years old, Sushiswap has climbed the ranks to challenge the biggest DEX. Its total volume traded is about $239 billion. a
- Pancakeswap — An indirect competitor for Uniswap, Pancakeswap is also performing exceptionally well in the markets. The DEX is based on Binance Smart Chain and aims to offer DEX services on this blockchain.
- Curve — Curve is another indirect competitor, focusing primarily on the exchange of stablecoins.
- Balancer — Balancer is another Ethereum-based platform that helps exchange any Ethereum-based ERC-20 tokens.
Final Word
The Uniswap DEX platform offers investors a wide range of opportunities to exchange crypto tokens using liquidity pools. Moreover, the platform allows other investors to maximize the process of liquidity provision and earn incomes. Since the DeFi space is still young and more tokens are launching, Uniswap will gain much more applications and adoption in the future.
Uniswap Ethereum-based DEX
Pioneered towards the end of 2018, Uniswap offers decentralized exchange services for the average DeFi token investors. It simply gave investors a home where they could swap tokens for others. Uniswap services include:
- Swapping of DeFi tokens
- Liquidity provision
A Thread (1/14
Uniswap is an AMM
Unlike centralized exchanges, which use order books, Uniswap leverages Automated market makers. AMMs are systems that leverage liquidity pools to provide constant liquidity in the markets.
2/14
Swapping DeFi tokens
Refers to the process of exchanging one DeFi token for another. Uniswap allows investors to exchange Ethereum-based ERC-20 tokens for other stablecoins and ERC-20 tokens. Among the tokens supported in Uniswap include ETH, USDC, DAI, UNI, etc.
3/14
Supports Multiple Wallets and Payment Tokens
Uniswap has the utmost support for several wallets, mainly based on the Ethereum blockchain network. Among the wallets are Metamask, WalletConnect, and Coinbase wallet. The primary payment token in Uniswap is ETH.
4/14
Multi-Blockchain support
Uniswap supports not only Ethereum but also other blockchains mostly connected to ETH. The secondary chains supported include Polygon, Optimism, Arbitrum, and Celo. Notice that most external blockchains supported except Celo are layer two solutions.
5/14
Multilingual support
Uniswap network affords efficiency to investors by offering Multilingual support. The platform supports many other languages. You can change the languages from the user-friendly interface afforded.
6/14
What is Liquidity provision?
Liquidity provision essentially refers to adding liquidity into Uniswap-based liquidity pools. Liquidity pools contain two assets in a fixed ratio. Providing liquidity in Uniswap means adding the two tokens at the same ratio.
7/14
Powered by UNI token
The UNI token is the heart of the Uniswap network. UNI token helps power the main activities of the Uniswap platform. UNI holders can participate in the governance of the network. They can vote to decide the future direction this platform should take.
8/14
UNI Token Economics
Uniswap set the maximum UNI token supply at 1 billion tokens, with a circulating supply of over 762 million as of October 2022. You can purchase the UNI tokens from many exchanges, including Coinbase and Binance.
9/14
Who is Uniswap’s Competitor?
Uniswap faces competition from over a dozen direct and indirect competitors of this decentralized crypto exchange platform. The direct competitors offer similar services in the identical blockchain. Uniswap’s main direct competitor is SushiSwap.
10/14
Uniswap Indirect competitors
While Sushiswap is Uniswap’s biggest competitor, several other indirect competitors exist. Indirect competitors offer DEX services for different types of assets or in different blockchains. Among the indirect competitors include;
- Curve Finance
- Pancakeswap
11/14
Negatively impacted by Ethereum Gas Charges.
Based on and offering services for Ethereum-based tokens, Uniswap is often negatively affected by gas hikes. The massive Ethereum gas charges often discourage investors from trading, affecting users of Uniswap.
12/14
You Can Provide Liquidity for Uniswap
The top DEX platform allows people to earn good rewards by increasing pool liquidity. Uniswap has a 0.3% reward fee for liquidity providers in the markets.
13/14
How can you Use Uniswap?
Uniswap ultimately simplifies each of its processes. You can provide liquidity, create a new pool, swap tokens and vote by simply navigating to the home UI and connecting a wallet. Everything after the wallet connection is straightforward.