Crypto 101: Guide To The Leading DEX Uniswap
Recent years have marked a new development for Crypto as the “decentralized” market is growing in popularity. One of the most prominent names is Uniswap – the largest decentralized exchange today. So what is Uniswap? How to use Uniswap V1 and V2? Check out CoinCu’s Crypto 101 column to learn about this topic as well.
What is Uniswap?
Uniswap is an open-source liquidity protocol based on Ethereum intended to be used for the exchange of ERC-20 tokens.
Founded by Ethereum developer – Hayden Adams in November 2018. By April 2019, the team had successfully passed a seed round with a $1 million investment from Paradigm. (Paradigm is a company that invests mainly in Blockchain technology.) Currently, it is one of the most popular decentralized exchanges (DEX) on the market.
Unlike most centralized exchanges, Uniswap is a community-driven tool that helps the community trade tokens without paying platform fees or middlemen.
Features of Uniswap
When it comes to Uniswap, we need to mention two main features: Swap and Pool.
- Swap: Translating to swap, this feature allows to swap Ethereum and various ERC-20 tokens.
- Pool: With the feature, users can earn money by becoming LP (Liquidity Provider). Do it by depositing tokens into a smart contract and in return, you will receive tokens in that pool.
How Uniswap Works
Centralized exchanges (CEX) connect buyers & sellers through the order book. Tokens are priced through the lowest price a seller wants to sell & the highest price a buyer is willing to pay.
Uniswap will use an automated market-making protocol. These are usually smart contracts that traders can trade-in. The price is calculated based on the instantaneous supply and demand of the 2 tokens in the pool. This price runs on the curve of the equation x * y = k. In there:
- x: the amount of token A
- y: the amount of token B
- k is a constant constant
Based on this equation, you can notice:
- Case 1: When K changes (more people contribute assets to the Pool), then X or Y changes. In this case, if the ratio of X and Y changes proportionally, the price of tokens A and B will remain the same or change little.
- Case 2: When K is constant, but X and Y change, then the A and B token values must change.
What is a Liquidity Provider?
Unlike some exchanges that operate on an order book, Uniswap works on a liquidity pool. That helps the liquidity of cryptos traded on Uniswap always “green”.
Those who provide liquidity to the DEX are called Liquidity Providers (LPs). In return, they will receive 0.25% of the swaps incurred on each transaction multiplied by a percentage of the funds they have provided to that pool.
Advantages and disadvantages of Uniswap
Convenient and easy to use: When making a transaction on UniSwap, it only takes about 1 minute, you absolutely do not have to go through the steps of creating an account, verifying KYC, or setting up 2FA… like on other exchanges.
Relatively low transaction fees: UniSwap charges a flat fee of 0.3% per transaction, which is relatively cheaper than some other decentralized exchanges.
Decentralization: This means that your assets are completely managed by you. You do not need to depend on a third party and are not afraid of security risks.
Opportunities to access new coins/tokens: Usually, certain crypto projects will have to go through a censorship process with a listed coin/token exchange. On Uniswap, users can get these new tokens first. And with the dramatic fluctuations in token prices, especially when they first launch.
Lacks many features compared to centralized exchanges: In centralized exchanges, when you find that a token is priced high, you can place a pending order to buy it at a lower price. In addition, you can margin trading, and set take-profit/stop-loss orders automatically.
Lack of support: Because you manage the property yourself when a swap order is pending, or there is a problem, you cannot contact anyone for support.
Risk of fraud: If you do not learn carefully, it is very easy to encounter a scam. Finding a good project has never been easy among the hundreds and thousands of projects on UniSwap.
Often encounter unsuccessful transaction problems: When transacting on Uniswap, it is very common to encounter unsuccessful transactions for many different reasons.
Technical knowledge: understanding the nature of token swaps requires users and a certain amount of knowledge about cryptocurrency exchanges and wallets.
Difference between Uniswap V1, V2, and V3
This version always executes two transactions. The first transaction to swap ERC20 tokens for ETH and the third transaction to swap your ETH back to the desired ERC20 token. In other words, the end-user pays the fee twice.
However, the way this works has caused some limitations when using Uniswap V1:
- Higher transaction fee
- Stick with the use of ETH
- ERC20 tokens cannot be swapped directly with other ERC20 tokens.
Due to the limitations of Uniswap V1, the introduction of V2 was necessary.
Uniswap V2 offers end users 3 different options to swap their tokens, using “Router Contract”. The Router Contract is aware of every exchange contract that implements the V2 protocol.
Here are three swap possibilities you can choose from
- Swap directly between two ERC20 token pairs. For example, two stablecoins like DAI/USDC can be very useful for traders.
- Traditional Swap via ETH where you pay 2x fees.
- Swap Custom path where you can build a more complex path like DAI/ETH, ETH/BAT, BAT/USDT, and USDT/USDC to swap your DAI to USDC. Usually, this provides traders with arbitrage opportunities.
These features make Uniswap V3 the most flexible and efficient AMM ever designed:
- LPs can provide liquidity with up to 4000x capital efficiency relative to V2, earning higher returns on their capital
- Capital efficiency paves the way for low-slippage trade execution that can surpass both centralized exchanges and stablecoin-focused AMMs
- LPs can significantly increase their exposure to preferred assets and reduce their downside risk
- LPs can sell one asset for another by adding liquidity to a price range entirely above or below the market price, approximating a fee-earning limit order that executes along a smooth curve
Instructions on how to trade Uniswap V3
Step 1: Visit the website: https://app.uniswap.org/
Step 2: Select “Connect Wallet“. Here will use the Metamask wallet.
Step 3: Choose the token you want and swap. Or you can paste the contract directly to find the token.
Uniswap currently exists 2 versions of Uniswap V2 and V3 in parallel. When trading any 1 pair, Uniswap will choose the better price in 2 versions.
Example: When trading ETH/DAI pair. Since the V3 version gives better scaling, this new version is used by default.
However, if you try to trade another less popular pair, like ETH/BNT, the screen will say “Get a better price on V2”.
That means the V2 version offers a better rate. Maybe it’s because the liquidity on V2 hasn’t been completely transferred yet. And to trade on Uniswap V2, just click on that “Get a better price on V2” button and trade as usual.
If you want to switch back to V3, keep clicking on it and go back to the new version “Back to V3“.
Instructions for providing liquidity on Uniswap v3
Step 1: On the main screen of Uniswap, select Pool ⇒ select New Position.
Step 2: Fill in 4 information to provide liquidity. Consists of:
- Choose 2 tokens that provide liquidity.
- Select a fee. There will also be 3 fees for the option: 0.05%, 0.3%, 1%.
- Choose a price range that will provide liquidity. Choose the price range where the price will move mostly around that area. For example in this case, when the ETH price is at 3500 DAI, it is possible to choose to provide liquidity at the price of 1 ETH equal to 3000 DAI – 4000 DAI.
- Choose the amount that will provide liquidity.
Step 3: After completing the above 4 information, just select Approve + Add liquidity and confirm in Non-custodial wallet.
Above is the necessary information as well as detailed instructions on how to use the Uniswap V3 exchange on all available platforms. Hopefully, the steps of CoinCu will bring a lot of knowledge as well as useful information for you.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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