Decentralized exchange (DEX) Uniswap is the most popular DEX built on the Ethereum blockchain. For users wondering “What is Uniswap?”, this article provides an overview of what it is and how it works, as well as several ways users can get started with the Uniswap DEX.
With Uniswap, users can trade cryptocurrency tokens without having to rely on a middleman. The fact of not having to depend on a third party means that only economic rents are collected. Instead, Uniswap relies on smart contracts to execute the trades. Smart contracts are algorithms that auto-execute once certain pre-set conditions are met.
How does Uniwap work?
Since Uniswap is an open source protocol, many DEXes have been released with the suffix “swap”. These protocols are essentially copies of the original Uniswap source code.. Where they differ is in the graphical user interface (GUI), as well as in the differentiation of the offer and positioning.
The most famous—and most controversial—of these copycats is Sushiswap. After copying Uniswap’s source code, he proceeded to launch a vampire attack or vampire attack. A vampire attack consists of a DeFi protocol offering various incentives to liquidity providers. This type of attack aims to take liquidity away from the target protocol.
How did Sushiswap pull off a successful vampire attack? The platform launched an aggressive marketing campaign. They also made it easy to switch to Uniswap’s liquidity providers. Lastly, they offered incredibly lucrative rewards to make it worthwhile.
Another less controversial example is Pancakeswap. This DEX is on the Binance Smart Chain. Pancakeswap offers non-fungible tokens (NFTs) and provides yield farming opportunities, which Uniswap does not.
But nevertheless, Uniswap is the first DEX to be based on an automated market maker model (AMM, for its acronym in English), rejecting the traditional open book model. The open book model is not as favorable for DEXs due to, among other factors, liquidity issues. However, the AMM model uses a liquidity pool with a constant product market maker model and is therefore based on the Constant Product Formula:
It is worth noting that in version 1 or v1 of Uniswap, liquidity pool providers were at risk of impermanent loss. In other words, it’s best to think of v1 as a minimum viable product that was released for beta (or even alpha) testing.
With each iteration, Uniswap brought considerable improvements to the users. For example, v2 introduced UNI token oracles and airdrops. UNI Tokens are the official government token of the DEX Uniswap. Uniswap users received airdrops of these tokens if they used the platform before September 2020.
For v3, the most noticeable improvement came in the form of concentrated liquidity. This novel form of liquidity allowed liquidity providers establish the conditions under which they would receive their commissions.
What’s more, Uniswap v3 was launched on the Optimistic Ethereum network. Optimism is a layer two scaling solution that is far superior to Ethereum’s layer one. Its main advantages are the reduction of slippage and high gas rates, as well as the speed of almost instantaneous transactions.
Then, How do you buy coins on Uniswap? Before getting into the topic of how to use Uniswap, it is important to answer the question: Is it safe to use Uniswap? Are smart contracts, blockchain technology and Decentralized Finance (DeFi) safe? These are the technologies that Uniswap is based on.
The Ethereum blockchain is extremely secure, unless there are vulnerabilities open to exploits. For example, Uniswap suffered an exploit bug in the past with a reentry attack, but the bug has since been fixed (which makes Uniswap stronger in the long run). And since then, liquidity and trading volume have only increased, and considerably.
Let us now see how the platform can be used.
How to use Uniwap?
Users who want to learn how to trade on Uniswap have many options at their disposal.. This section covers how to use Uniswap with mobile and Trust Wallet as well as the Coinbase wallet.
But first, the steps on how to use the Uniswap protocol with Metamask are discussed. Next, this section introduces the steps for the two mobile-friendly approaches.
Note that Metamask is just as easy to use on mobile. But nevertheless, being a web wallet that works as a browser extension, its user experience is flawless on desktop computers, practically without competitors. For this reason, this article focuses on the Metamask desktop experience..
How to use Uniswap with Metamask?
The steps to use Uniswap with Metamask are shown in the figure below:
How to use Uniswap with Coinbase
Coinbase’s approach may be less intimidating to US citizens who are already familiar with the platform. Novice users should start the steps below after opening a Coinbase account. Those who already have an account can start with step 1.
How to use Uniswap with Trust Wallet?
Wallet is one of the most popular mobile wallets, and there is a reason for it. Trust Wallet is easy to use, friendly and offers a number of tools for users. Below are the steps to use Uniswap with Trust Wallet.
A critical deterrent for new Uniswap users is Uniswap’s exorbitant fees. Because Uniswap is hosted on the Ethereum blockchain, it relies on ETH for gas fees. Due to the design of Ethereum, higher congestion leads to higher gas fees because it fuels a bidding war between users who compete to have their transactions inserted into the next block first.
To avoid failed transactions, considers go into Uniswap settings. (Users can do this by using a click on the gear icon). Before executing a trade, users should adjust the slippage tolerance to about 12%.
The slippage tolerance is simply the difference in price from when a transfer is confirmed to the price sellers are willing to accept.. The slippage tolerance setting ensures that user transactions are executed in advance. Early execution increases the chances that the transaction will be included in the next block.
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