Since Uniswap is an open protocol of smart contracts, a number of different front-end user interfaces have already been created for it. For example, InstaDApp allows you to add funds into Uniswap pools without needing to access the official Uniswap user interface. Any token can be added to Uniswap by funding it with an equivalent value of ETH and the ERC20 token being traded. Like everything powered by Ethereum, you will have to pay gas fees in ETH to process transactions on the Uniswap protocol. Sometimes, in rare circumstances and at times of high market volatility, you may even have to go up to 5% slippage to successfully process a transaction. This is only recommended if you really feel you need to get an entry into a token, and you want to make sure you get a good position.
Automated Market Maker (AMM) Model
The decentralized finance industry is a competitive one, to say the least. This means that Uniswap could be popular one week, only for another DeFi protocol to steal the limelight the next. Let’s imagine that someone uses a liquidity pool to buy ETH in exchange for USDT. This transaction would ultimately mean there is now less ETH in the liquidity pool, and more USDT.
How to Use Uniswap for Token Swap
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. Whenever someone buys Durian Token with ETH, the supply of Durian Token decreases while the supply of ETH increases–the price of Durian Token goes up. Here’s a little disclaimer before we teach you about Expert mode – if you’re not an expert, don’t use it! Expert mode allows ultra-high slippage trades, which can often result in poor rates of exchange between assets, and even make you lose part of your original asset or funds.
Uniswap is a DEX that lets users trade cryptocurrencies without depending on a central authority or intermediary, while maintaining censorship resistance. Operating on the Ethereum blockchain, Uniswap leverages smart contracts — self-executing programs on the blockchain with predetermined conditions directly written into code. Once you’ve chosen the tokens you want to trade, you can enter the amount you want to trade.
One of the most significant changes was the introduction of ERC-20 to ERC-20 pairs, which meant liquidity providers could create pair contracts for any two ERC-20 tokens. As of today, the Uniswap Protocol is the fifth largest application on Ethereum with over $5 billion in total value locked (TVL). Trading non-fungible tokens (NFTs) on Uniswap involves a simple process that leverages the platform’s decentralized exchange capabilities.
It’s worth noting that this change favors more experienced market makers over beginner participants. With this additional layer of complexity, less active LPs may earn less in trading fees than professional players who optimize their strategy consistently. Uniswap is trying to solve decentralized exchanges’ liquidity problem, by allowing the exchange to swap tokens without relying on buyers and sellers creating that liquidity. Uniswap is an example of one of the core products in the DeFi ecosystem, the decentralized crypto exchange, or DEX. DEXs aim to 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 lack of liquidity—which means a lack of amount of money sloshing around an exchange that makes trading faster and more efficient.
- Additionally, the integration allows Uniswap to tap into a new pool of liquidity and increase awareness and adoption among both retail and institutional investors.
- To contribute to a liquidity pool, you need an equal value of ETH and ERC20 tokens.
- Essentially, Uniswap is a smart contract for the exchange of ERC-20 tokens.
- Operating on the Ethereum blockchain, Uniswap leverages smart contracts — self-executing programs on the blockchain with predetermined conditions directly written into code.
What Makes the Uniswap V3 Exchange Different?
You can buy or sell one token for another based on the current exchange rate. Additionally, you’ll see a network fee, which is the gas cost you can expect to pay to perform the swap. The Uniswap Protocol uses a constant product formula to determine the price of an asset. When a token is withdrawn (bought) from a pool, a proportional amount must be deposited (sold) to maintain the constant. The ratio of tokens in the pool, in combination with the constant product formula, ultimately determines the price of a token. Some of the main advantages of Uniswap include that it is far less complicated to use than other decentralized exchanges — and it means buyers and sellers are no longer responsible for creating liquidity.
Each token has its own smart contract and liquidity pool–if one doesn’t exist, it can be created easily. Once you are happy with the exchange rate and slippage tolerance, go ahead and click ‘Swap’. You will now be prompted to confirm the swap via your wallet plugin and select your gas price. There are also options to use WalletConnect, Coinbase Wallet, Fortmatic, and Portis wallets for ease of access.
UNI tokens can be bought and sold on various cryptocurrency exchanges, so traders can use UNI tokens to trade for other cryptocurrencies or to participate in decentralized finance (DeFi) applications. Do note that new use cases may emerge through community requests and governance votes. Uniswap operates as a decentralized exchange, meaning it is not owned or operated by a single entity.
Step 3: Choose the tokens you want to trade
In less than a year, Uniswap V2 has propelled the platform to meteoric growth. On the top right, click the ‘Connect to a wallet’ button, and log in with the wallet you wish to trade with. This can be either a MetaMask, WalletConnect, Coinbase Wallet, Fortmatic, or Portis Wallet. Uniswap was created by Hayden Adams, who was inspired to create the protocol by a post made by Ethereum founder Vitalik Buterin. We have several resources to help you get started with the Uniswap Protocol.
We publish guides, reviews and news on tech, cryptocurrency, Bitcoin, blockchain & privacy. Our content is updated regularly to keep our privacy-minded readers safe, informed & up to date. Do note that the above scenario applies whether the price rises or falls from the time of the deposit. This means that if the price of ETH decreases from the time of the deposit, the losses incurred by the LP may also be amplified.
Essentially, if your swap hasn’t been filled in 20 minutes or the given amount of time, it will be automatically canceled. Let’s explore the most common things new Uniswap users stumble on when using the decentralized liquidity protocol. Once connected, in the top box, simply select the asset you want to swap and enter the amount, or click ‘max’ if you want to swap all of your asset. This should make it how to calculate interest rates on bank loans much easier to transfer your assets across from Coinbase and swap them for ERC-20 tokens easily. Be careful though, as you can only use ETH and Ethereum-based tokens on Uniswap – don’t try and use Bitcoin, for example.
The UNI token entitles its holders to governance rights, meaning they can vote on changes and improvements to the protocol. The extent of voting power a user has is proportional to the number of governance tokens they hold. The governance process is decentralized, which means anyone can submit a proposal and anyone can vote. This loss is referred to as “impermanent” because it can be mitigated if the prices of the pooled tokens revert to the same prices as when they were added to the pool. Additionally, since LPs earn fees, the loss may be balanced out over time. Nonetheless, LPs should be aware of the concept of impermanent loss before adding funds to a Uniswap pool.
As a result of massive congestion on the Ethereum network, transaction fees have shot through the roof—making trading on Uniswap an expensive task, particularly when concerning low-value trades. To do this, you’re going to need some ETH in your balance to pay for any transaction fees, as well as something to trade for the ERC20 token you want. For example, if you’re looking to trade USD Coin (USDC) for UNI, you’re going to need to hold USDC in your wallet plus some ether to cover the transaction fee. Absolutely any ERC20 token can be listed on Uniswap–no permission required.
