Uniswap has provided a much-needed boost to Decentralized Exchanges (DEX). The entire cryptocurrency trading ecosystem was ruled by Centralized Exchanges many of which provided high liquidity and excellent Fiat on and Off-Ramp. Well, the introduction of Uniswap has at least resolved the problem of high decentralized liquidity.
What is Uniswap?
Uniswap is a fully decentralized, Ethereum based protocol which provides automated liquidity powered by a simple formalized equation. It is built on a system of non-upgradeable smart contracts. Anyone can create new markets and also get rewarded for that. It is censorship-resistant.
- Growing liquidity
- Rewards to liquidity providers
- Trading and Holding in the same ecosystem and also staying decentralized (Metamask is integrated with Uniswap)
How does Uniswap work?
Smart Contracts: Uniswap trading pairs are run by individual smart contracts in the backend. Each of these smart contracts manages a liquidity pool.
Liquidity Pools: Liquidity providers can create pair contracts for any two ERC-20s. They deposit an equivalent value of underlying ERC-20 tokens in return for pool tokens.
Liquidity Tokens: Uniswap mints special tokens known as liquidity tokens to a liquidity provider’s address. This is proportional to the liquidity provider’s contribution to the pool. The liquidity providers burn these tokens to receive their incentive in the form of the fees which a trader paid. They can be redeemed for any ERC-20 asset at any time.
Market Making: Pairs are automatic market makers. The only condition is that the “constant product” formula needs to be preserved.
Trading: Trading is replaced by swapping in Uniswap. A user specifies an input token and the output token he desires. He also specifies the amount of the input token. Uniswap calculates the amount of output token the user will receive. Swap happens with one click.
Fees: Traders pay a 0.30% fee on all trades. This amount gets split
- 3% (0.25% of the amount traded) goes to the liquidity providers
- 6% (0.05% of the amount traded) will goes to the protocol
How to use Uniswap
- Install Metamask (Web 3 wallet). You can install it as a Google Chrome extension. All trades will happen through this decentralized wallet.
- Go to the website
- Click on Launch App
- You will be directly taken to the Swap/ Pool page.
- Select the version of Uniswap you want to use. Version 2 is preferred. We will discuss in a future article about the difference between the two.
- Connect your Metamask wallet to Uniswap using “Connect to a Wallet”
- Metamask connecting with Uniswap
- In case of Swap, if you are trading, select the input token
- Select output token
I selected MATIC
- Swap and the Output token will be in your Metamask wallet.
In case of a Pool, add liquidity
- Select the tokens you want to put in a pool.
Thanks, Its easy, safe, and truly decentralized.
I think that Uniswap will go a long way in taking forward the cause of a decentralized exchange. It solves the big problem of trading/ swapping without funds moving from a decentralized wallet. This is the future.