Decentralized exchanges or DEXs have many advantages over centralized exchanges (CEX) regarding security, cost efficiency, and privacy. They typically do not rely on third-party platforms for operations and feature anonymity for its users.
Uniswap is one such Decentralized Exchange. Meaning, no single entity owns it. It uses a protocol called Automated Liquidity Protocol.
Even though DEXs are looked at as the future of trading exchanges, they are not without their flaws. Liquidity is one of them- means the amount of funds flowing around is limited, at least for most of them. That’s where Uniswap comes into the picture.
By now, you must have wondered, what is Uniswap exchange and how it works? Today, we will try to decrypt that.
What is Uniswap Exchange?
In simple words, the Uniswap Exchange is a decentralized exchange based on the Ethereum network that allows its users to swap ERC20 tokens.
It is one of the biggest exchanges in the world when you consider its market share by volume.
Uniswap was designed by developers in New York with goodwill in mind that’s why unlike most other exchanges out there, there are no platform fees.
With almost exactly the same user interface, the Uniswap V2 further improves on V1. There is no longer a need to convert every token into ETH intermediately for swapping into another one. It also introduces some security and usability improvements for optimal user experience.
How does Uniswap work?
Uniswap uses some simple math equations and some pools of tokens along with ETH. This technique is different from most exchanges, which match buyers and sellers to determine prices and execute trades.
We will now take a look into the complete form and function of the Uniswap Exchange.
Generation of Tokens
Upon contribution of ETH/ERC20 tokens to a Uniswap liquidity pool, the contributor receives an ERC20 token or a ‘pool token.’ These Pool tokens are created on the deposition of funds into the pool.
As an ERC20 token, pool tokens can be freely moved, exchanged, and used in other dapps.
Upon reclaiming of funds, the pool tokens are destroyed. Typically, each pool token represents a particular user’s share of the pool’s total assets and share of the pool’s 0.3% trading fee.
Automated liquidity protocol
Uniswap has managed to solve the liquidity problem by incentivizing users into becoming Liquidity Provides or LPs. These LPs pool their money to create a large fund that is used to perform all operations on the platform.
In exchange for putting up their contribution into the fund, each LP receives a token that represents the staked contribution to the pool. It is valued at the portion of the fund amount pooled by the respective LP. This token can then be redeemed for a share of the trading fees.
Deciding token price
Instead of using rates from highest buyer and lowest seller, Uniswap uses an automated market maker system for deciding token prices at the time of swap.
For swapping x amount of token A with y amount of token B, Uniswap uses an equation x * y = k where k is a constant. This equation helps in adjusting the prices of assets based on supply and demand.
Something important to note here: whenever someone adds a new ERC-20 token to Uniswap, that person has to add a certain amount of the new chosen ERC-20 token along with an equal amount of another ERC-20 token to start the liquidity pool.
Swapping Tokens on the Uniswap Exchange
Uniswap exchange uses an open protocol of smart contracts. This means there are many existent applications design as front-end interfaces for users. Some of them allow transferring funds into the pool without visiting the Uniswap platform. InstaDApp is one such interface.
For swapping tokens, you would also need an Ethereum address. This can be one of the supported wallets.
Once you have a wallet, you can add tokens to Uniswap’s liquidity pool or swap them using one of the available pairs. It is just the matter of selecting which token you want to swap out of and which token you want to swap into.
Once you confirm it from your wallet, after deducting a 0.3% fee, you will see updated tokens in your account.
What sets Uniswap apart from its competitors?
There are a few areas where Uniswap is just better than its direct competitors. These features make it one of the most popular exchanges to date.
- Permission-free operation: Unlike traditional trading platforms, trading on Uniswap does not require any preapproved account. You just need an Ethereum wallet.
- You have full custody: Most trading platforms like Coinbase have custody of your tokens unless you move them into your wallet. Uniswap has no such requirement; you have complete control over your tokens as you would have to keep your tokens safe in your wallet.
- Availability of unique pairs: Due to the ease of use for customers, most new Ethereum based tokens become available on Uniswap first. This results in users being able to use swapping pairs that aren’t yet available elsewhere.
The Uniswap platform is highly secure and very well maintained. It is a decentralized platform for swapping crypto that the community has long been waiting for.
The simplicity is there to see – from its interface to its core design.
With Uniswap V2, the development team did what most wanted. Keeping the old familiar yet functional design for the platform while adding more features and making the platform more robust and secure.
The popularity of Uniswap showed the world that not only decentralized exchanges can be as popular as conventional centralized exchanges, but they can even be better at most things!
I hope this article helps you and if you have any queries related to it then do leave your comment below. If you have not joined our community then you can now. We are very active there and have been sharing important information there.
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