What Is Uniswap? A Full Newbie’s Information
Uniswap is a leading decentralized crypto exchange that runs on the Ethereum blockchain.
The vast majority of crypto trading takes place on centralized exchanges like Coinbase and Binance. These platforms are managed by a single authority (the company that runs the exchange). Users need to put funds under their control and use a traditional order book system to make trading easier.
In order book based trading, buy and sell orders are presented in a list along with the total amount placed in each order. The number of open buy and sell orders for an asset is known as the “Depth of Market”. In order to trade successfully with this system, a buy order must be matched with a sell order on the opposite side of the order book for the same amount and price of an asset and vice versa.
For example, if you want to sell a Bitcoin (BTC) at a price of $ 33,000 on a central exchange, you would have to wait for a buyer to appear on the other side of the order book looking to buy an equal or greater amount of Bitcoin at that price.
The main problem with this type of system is liquidity, which in this context refers to the depth and number of orders that are in the order book at any given time. When liquidity is low, traders may not be able to execute their buy or sell orders.
Another way of thinking about liquidity: Imagine you own a grocery stall in a street market. When the street market is busy with stallholders selling goods and people buying products and products, this is considered a “liquid market”. If the market were calm and little bought and sold it would be considered a “narrow market”.
What is Uniswap?
Uniswap is a completely different type of exchange that is completely decentralized – that is, it is not owned and operated by a single entity – and uses a relatively new trading model called the automated liquidity log (see below).
The Uniswap platform was built on the Ethereum blockchain in 2018, the second largest cryptocurrency project in the world by market capitalization. This makes it compatible with all ERC-20 tokens and infrastructures such as wallet services such as MetaMask and MyEtherWallet.
Uniswap is also completely open source, which means anyone can copy the code to create their own decentralized exchange. It even allows users to list tokens on the exchange for free. Normal centralized exchanges are for profit and have very high fees for listing new coins. That alone is a remarkable difference. Since Uniswap is a decentralized exchange (DEX), it also means that users remain in control of their funds at all times, unlike a central exchange where merchants have to give up control of their private keys in order to place orders in An internal database can be logged than run on a blockchain, which is more time consuming and expensive. Maintaining control over private keys eliminates the risk of losing assets if the exchange is ever hacked. According to the latest figures, Uniswap is currently the fourth largest DeFi (decentralized finance) platform and has crypto assets worth over $ 3 billion in its log.
How Uniswap works
Uniswap runs with two smart contracts. an “Exchange” contract and a “Factory” contract. These are automatic computer programs that perform certain functions when certain conditions are met. In this case, the Factory Smart Contract is used to add new tokens to the platform and the exchange contract facilitates any token swaps or “trades”. Each ERC20-based token can be exchanged for another on the updated Uniswap v.2 platform.
Automated liquidity log
Uniswap solves the liquidity problem of central exchanges described in the introduction by means of an automated liquidity log. It does this by creating incentives for people traded on the exchange to become liquidity providers (LPs): Uniswap users pool their money to create a fund that is used to carry out all the trades that take place on the platform. Each token listed has its own pool that users can contribute to. The prices for each token are calculated using a computer-run mathematical algorithm (see “How to Find the Token Price” below). With this system, a buyer or seller does not have to wait for a counterparty to show up to complete a trade. Instead, they can instantly execute any trade at a known price, provided the pool in question has enough liquidity to make this possible. In return for raising their money, each LP receives a token that represents the contribution to the pool. For example, if you deposited $ 10,000 into a liquidity pool with a total volume of $ 100,000, you will receive a token for 10% of that pool. This token can be redeemed for part of the trading fees. Uniswap charges users a flat fee of 0.30% for every trade that takes place on the platform and automatically sends it to a liquidity reserve. If a liquidity provider decides they want to exit, they will receive a portion of the total fees from the reserve in proportion to their stake in that pool. The token they received that records what stake they owe will then be destroyed. After upgrading from Uniswap v.2, a new log fee was introduced that can be turned on or off via a community vote and essentially sends 0.05% of every 0.30% trading fee to a Uniswap fund to keep the future Fund development. This fee option is currently deactivated. However, if it is ever activated, LPs will receive 0.25% of the pool trading fees.
How the token price is determined
Another important element of this system is determining the price of each token. Instead of an order book system where the price of each asset is determined by the highest buyer and lowest seller, Uniswap uses an automated market maker system. This alternative method of adjusting the price of an asset to match supply and demand is based on a longstanding mathematical equation. It increases and decreases the price of a coin depending on the ratio of the number of coins in the respective pool. It is important to note that every time someone adds a new ERC-20 token to Uniswap, a certain amount of the selected ERC-20 token and the same amount of another ERC-20 token must be added to the liquidity pool to start. The equation for calculating the price of each token is x * y = k, where the amount of tokens A is x and the amount of tokens B is y. K is a constant value, also known as a number that doesn’t change. For example, Bob would like to exchange Chainlink (LINK) for ether with the Uniswap LINK / ETH pool. Bob adds a large number of LINK to the pool, which increases the ratio of LINK in the pool to ether. Since the value of K must remain the same, this means that the cost of ether increases while the cost of the connection in the pool decreases. The more LINK Bob uses, the less ether he gets back because the price goes up. The size of the liquidity pool also determines how much the price of tokens changes during a trade. The more money, also known as liquidity, in a pool, the easier it is to make larger trades without the price dropping that much.
Graphic by Vitalik Buterin
Arbitrage traders are an integral part of the Uniswap ecosystem. These are traders who specialize in finding price differences between multiple exchanges and using them to make a profit. For example, if Bitcoin is trading on Kraken for $ 35,500 and Binance is trading at $ 35,450, you can buy Bitcoin on Binance and sell it on Kraken for an easy profit. With large quantities, it is possible to make a significant profit with relatively little risk.
Arbitrage traders at Uniswap find tokens that are trading above or below their average market price – due to large trades creating imbalances in the pool and lowering or increasing the price – and buy or sell them accordingly. They do this until the price of the token is balanced with the price on other exchanges and there is no more profit to be made. This harmonious relationship between the automated market maker system and arbitrage traders keeps Uniswap token prices in line with the rest of the market.
How to use Uniswap
Getting started with Uniswap is relatively easy. However, you need to make sure that you already have an ERC-20 supported wallet setup such as MetaMask, WalletConnect, Coinbase Wallet, Portis or Fortmatic.
Once you have one of these wallets, you’ll need to add ether to trade with Uniswap and pay for gas – that’s what Ethereum’s transaction fees are called. Gas payment prices vary depending on how many people are using the network. With most ERC-20 compatible wallet services, you have three options when making a payment on the Ethereum blockchain: slow, medium, or fast. Slow is the cheapest option, fast is the most expensive, and medium is somewhere in between. This determines how quickly your transaction will be processed by Ethereum network miners.
1. Go to https://uniswap.org
2. Click on “Use Uniswap” in the upper right corner.
3. Go to “Connect Wallet” in the top right corner and select the wallet you have.
4. Log into your wallet and have it connect to Uniswap.5. On the screen, you have the option to exchange tokens directly from the drop-down options next to the “From” and “To” sections.
6. Select the token that you want to exchange, enter the amount and click “Exchange”.
7. A preview window of the transaction will appear and you will need to confirm the transaction in your ERC-20 wallet.
8. Wait for the transaction to be added to the Ethereum blockchain. You can check the progress by copying and pasting the transaction ID in https://etherscan.io/. The transaction ID is available in your wallet by finding the transaction in your sent transaction history.
Uniswaps UNI tokens
The native Uniswaps token UNI is called a governance token. This gives holders the right to vote on new developments and changes to the platform, including how minted tokens should be distributed to the community and developers, as well as changes in fee structures.
The UNI token was originally created in September 2020 to prevent users from migrating to rival DEX SushiSwap. One month before the UNI token launch, SushiSwap – a spinoff from Uniswap – had encouraged Uniswap users to allow SushiSwap to reallocate their funds to the new platform by rewarding them with SUSHI tokens. This was a new type of token that gave users governance rights over the new protocol, as well as a fair amount of any transaction fees paid to the platform.
Uniswap responded by creating 1 billion UNI tokens and decided to distribute 150 million of them to everyone who had ever used the platform. Each person received 400 UNI tokens, which at that point amounted to over $ 1,000.