Here is Everything You Need to Know to Get Started With Uniswap
It’s actually quite simple.
So let’s say you just heard about this new project and you want to invest. Unfortunately, and probably unsurprisingly, it is not listed on your exchange of choice. Or perhaps you do find it on an exchange you use, but it would require you to sell other crypto into fiat and face high fees. What if you could just swap your ETH for that hot project instead of going through all the hassle? Enter Uniswap. Rising to 12th highest market cap in all of crypto, Uniswap has become one of the most prominent projects in the DeFi space. Uniswap is a decentralized cryptocurrency exchange founded by Hayden Adams and inspired by the writings of Vitalik Buterin with daily trading volumes surpassing that of Coinbase.
Why decentralized exchanges
Decentralized exchanges solve many of the problems of their centralized counterparts, including the risk of hacking, mismanagement, and arbitrary fees. However, decentralized exchanges have their own problems, mainly a lack of liquidity.
It starts with liquidity
Uniswap is trying to solve the DEX liquidity problem to allow users to swap tokens without buyers and sellers having to create the necessary liquidity. The concepts of “liquidity pools” and “automated market makers” are what Uniswap is using to solve this problem. Think of a liquidity pool as well.. a pool. But instead of water this pool is filled with cryptocurrency pairs like ETH/ADA. To trade your ETH for ADA, there needs to be enough ADA in the pool to cover the cost. The people ensuring that these pools stay filled are LP’s, or Liquidity Providers. Liquidity providers loan out their crypto in exchange for rewards.
What is Uniswap?
Uniswap is a protocol on Ethereum for swapping ERC20 tokens. Most exchanges are designed to take fees, but Uniswap is designed to function as a public good for the community to trade tokens without platform fees or middlemen. Also, unlike most exchanges that use the order book method to match buyers and sellers and determine prices and execute trades, Uniswap uses smart contracts, liquidity pools of tokens, and ETH to do the same job.
What makes Uniswap special?
Uniswap’s main distinction from other decentralized exchanges is the use of a pricing mechanism called the “Constant Product Market Maker Model.”
Any token can be added to Uniswap by funding it with an equivalent value of ETH and the ERC20 token being traded. Where Uniswap differs is that instead of connecting buyers and sellers to determine the price of tokens, Uniswap uses a constant equation:
x * y = k
In the equation, x and y represent the quantity of ETH and ERC20 tokens available in a liquidity pool, and k is a constant value. This equation uses the balance between the ETH and ERC20 tokens and supply-and-demand to determine the price of a particular token.
Any ERC20 token can be listed on Uniswap with no permission required. Each token has its own smart contract and liquidity pool; if one doesn’t exist, it can be created easily. Once a token has its own exchange smart contract and liquidity pool, anyone can trade the token or contribute to the liquidity pool while earning a liquidity provider fee of 0.3%. To contribute to a liquidity pool you need an equal value of ETH and ERC20 tokens.
What is the Uniswap token UNI
Uniswap’s native token, UNI, is known as 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 any changes to fee structures.
How to use Uniswap
1. Head to https://uniswap.org
2. Click “Use Uniswap” in the top right-hand corner.
3. Go to “Connect wallet” in the top right-hand corner and select the wallet you have.
4. Log into your wallet and allow it to connect to Uniswap. On the screen it will give you an option to swap tokens directly using the drop-down options next to the “from” and “to” sections.
6. Select which token you’d like to swap, enter the amount and click “swap.”
7. A preview window of the transaction will appear and you will need to confirm the transaction on your ERC-20 wallet.
8. Wait for the transaction to be added to the Ethereum blockchain. You can check its progress by copying and pasting the transaction ID into https://etherscan.io/. The transaction ID will be available in your wallet by finding the transaction in your sent transaction history.
TL;DR
Uniswap is an Ethereum based exchange that allows anyone to swap ERC20 tokens.
Traditionally, token swaps require buyers and sellers to create liquidity, but Uniswap creates markets automatically.
