Uniswap Exchange is the most popular Decentralized Exchange (DEX) now, it supports ECR-20 token swaps and yield farming. In this guide and review, we will introduce how to use Uniswap’s swap, flash swaps, send and pool functions, and take a look at its pros and cons.
What is Uniswap?
Uniswap is a protocol for automatic exchanges of ERC-20 tokens on the Etehreum blockchain. It is simple, anonymous, and easy to use. You don’t need to register an account and do KYC. All you need to do is open the website and connect it with your web3 wallet. Traditional token swaps require buyers and sellers to create liquidity, while Uniswap creates markets automatically and solves the liquidity problem.
According to CoinGecko, there are 392 coins and 717 trading pairs on the Exchange and the daily trading volume has exceeded 110 million USD by 28th July 2020. In the cryptocurrency world, we all value decentralization, however, most cryptocurrency trading happens in centralized crypto exchanges, like Binance and Coinbase. One essence of cryptocurrencies is that we own the control of our tokens. Uniswap is the rising start to compete with centralized exchanges.
Uniswap is an automated market maker. It is built on Ethereum 1.0 with its simple but outstanding algorithm. One restriction of Ethereum 1.0 is the ability to deal with complexity. Because of its simplicity, Uniswap beats other DEXs and becomes the king of DEXs.
Next, I will show you the key functions of Uniswap and how to use these functions.
How to use Uniswap Exchange
First, you need to connect Uniswap with your wallet. There are 5 wallets listed on this page.
Most people are using MetaMask, so I will take MetMask as an example. First, you need to install MetaMask plugin to your browser and sign up an account. Then you can deposit your cryptocurrencies to MetaMask from other wallets. If you don’t have any cryptocurrency, it’s fine. You can buy it on MetaMask.
Now let’s connect to MetaMask wallet on the browser. After you click “connect”, there will be a pop-up window from MetaMask wallet. After login your web3 wallet, you can read the cryptocurrencies in your wallet.
Of course, you can also connect with your hard wallet, e.g., Ledger Nano X.
Second, choose the coin you want to swap. Pay attention to this step! Don’t be trapped by some scam tokens. Uniswap allows open listing, so anyone can easily add tokens to the frontend of Uniswap by handling a request to Github. Now fake coins are prevalent on Uniswap, Uniswap even posted an official warning on this topic.
How to avoid this trap? DON’T believe in icons. Always check and match the contract number with the website address. 1) Visit Coingecko, search for the token you want to swap; 2) click Etherscan FROM Coingecko page; 3) get the contract number on Etherscan; 4) compare the contract number with the address on Uniswap. DON’T skip step 2, because fake tokens are on Etherscan, too.
Third, check the estimated price. Uniswap adopts dynamic pricing. The amount you received may be less than the estimated amount due to the price volatility. 3 reasons cause the price change. 1) Liquidity provider fees (0.3%); 2) which influences the final price range; 3) Price impacts which depend on the market volume. If you need to adjust slippage tolerance and transaction time, click the “setting” button on the up-right corner. If the transaction is not completed in your setting time, the transaction will be reverted.
Flash Swaps is one kind of flash loan. It is a good function to do capital-free arbitrage. Users can borrow as many as tokens from Uniswap and swap token A into another token B without paying token A in advance. But by the end of this transaction, users must pay Uniswap at least as much as they borrowed. If borrowed tokens are not returned, smart contracts will automatically roll back the previous transaction. Here are 3 requirements of Flash Swaps:
- pay for all ERC20 tokens withdrawn
- pay for a percentage of ERC20 tokens and return the rest
- return all ERC20 tokens withdrawn
The only drawback is that Uniswap will charge 0.30% of borrowed ERC-20 tokens, even if you return the input ERC-20 tokens.
You can also exchange a token which you don’t own and send it to others. Click “Add a send (optional)” to expand the interface page. The transaction fees and prices are shown below.
You can put your tokens into pools and get passive incomes. But pay attention here, Uniswap only accepts paired tokens, you cannot put a single kind of token into the pool. You need to provide some Token A and some Token B whose value is equal to token A to join a pool. X Token A = Y token B, then Token A and Token B are paired. By lending your paired tokens, you become a liquidity provider. Anyone who trades these pair of tokens needs to pay 0.3% of liquidity fees to you. What’s more, there are different pools, the token pair, yield and risk vary from one to another. The more volume in the pool, the fewer the slippage will be. One cool thing is that you can create new pools or new exchanges! There is no listing fee at all.
Now let’s have a look at how to join a pool.
First, find a pair of token that are traded frequently, so you have more chance to earn liquidity fees. Check liquidity and yield at http://www.uniswaproi.com
Second, input the amount of token, Uniswap will show you the relevant amount of paired tokens required. Third, transfer enough tokens to your wallet that has connected with Uniswap. Fourth, MetaMask (your web3 wallet) will ask you to confirm. Fifth, after confirmation, you return to Uniswap and click the “Supply” button.
Then you can check your yield and analyze your ROI.
At last, you can extract your earnings to your web3 wallet.
🔷V1 and V2
V1 and V2 provide different prices of some token swaps. The system will automatically remind you of the better proposal. You can switch easily between V1 and V2.
🔷Version 1 & Version 2
The founder of Uniswap, Hayden Adams, said: “Version 1 was almost this like a proof-of-concept, it was the first implementation of this protocol.” Version 2 works the same way as Uniswap v1, but it will take off its key limitation – running all token swaps through ETH. V2 also adds some new features, especially a new oracle system (price oracle is a mechanism to measure prices). This time-weighted oracle service that can flexibly deliver average prices over any length of time. To reduce significant bid/ask spread which bothers Uniswap V1, Uniswap V2 uses smart contracts to split a trade between multiple exchanges. This update helps reduce the overall trading losses when entering the DeFi ecosystem. Of course, the flash swaps is another new feature of V2 which benchmark flash loans of dYdX and Aave.
The transaction fee is 0.30% of each token swap. As a decentralized exchange, Uniswap won’t take this fee. The fee will be shared with the liquidity providers. If you contribute 30% of tokens to one pool, then you can yield 30% of the total transaction fees of that pool. Your yielding will be added back to the pool.
Smart contracts are more trustworthy than humans, and so far Uniswap hasn’t been hacked.
- Uniswap is an authentic decentralized exchange. You have control over your tokens.
- Uniswap keeps your anonymity, it doesn’t require KYC and registration.
- Uniswap shares transaction fees with liquidity providers, it is a public tool which doesn’t profit.
- The price oracles enable external smart contracts to create gas-efficient and time-weighted averages of Uniswap prices.
- Flash Swap is a great feature for arbitrage. Users can trade flash swaps on Uniswap itself, unlike dYdX. There are various assets which are available for Flash Swaps on Uniswag.
- It only supports ECR-20 tokens. if you need to swag bitcoin, you have to change bitcoin into wrapped bitcoin (wBTC).
- The prevalence of scam tokens caused by open listing.
- Flash swaps may boost cyber attack in the future. In Feb 2020, two hackers just used flash loans to attack the margin trading protocol bZx. Previously many attacks require lots of up-front capital, e.g., oracle manipulation attacks. With Flash swaps, attackers no longer need to have principals for the hack.
- Uniswap may be defeated by newcomers which are based on Ethereum 2.0 and layer 2 systems. Uniswap wins because of simplicity, in the future, Ethereum 2.0 and layer 2 systems will enable more complex markets to flourish, so the market share of Uniswap may be eroded.
✨✨Comment below and join our discussion! ✨✨
🚶♂️Follow me on Twitter ►►@AliceolaCrypto