Uniswap is a decentralized crypto exchange that runs on the Ethereum blockchain.
The vast majority of crypto trading takes place on centralized exchanges such as Coinbase and Binance. These platforms are governed by a single authority (the company that operates the exchange), require users to place funds under their control and use a traditional order book system to facilitate trading.
Order book-based trading is where buy and sell orders are presented in a list along with the total amount placed in each order. The amount of open buy and sell orders for an asset is known as “market depth.”
In order to make a successful trade using this system, a buy order has to be matched with a sell order on the opposite side of the order book for the same amount and price of an asset, and vice versa.
For example, if you wanted to sell one bitcoin (BTC) at a price of $33,000 on a centralized exchange, you’d need to wait for a buyer to appear on the other side of the order book who’s looking to buy an equal or higher amount of bitcoin at that price.
The main problem with this type of system is liquidity, which in this context refers to the depth and number of orders there are on the order book at any given time. If there’s low liquidity, it means traders may not be able to fill their buy or sell orders.
Another instance of liquidity: Imagine you own a food stall in a street market. If the street market is busy with stall owners selling goods and people buying produce and products, it would be considered a “liquid market.” If the market was quiet and there was little buying and selling going on, it would be considered a “narrow market.”
Uniswap is a completely different type of exchange that is fully decentralized – meaning it isn’t owned and operated by a single entity and uses a relatively new type of trading model called an automated liquidity protocol (see below).
The Uniswap platform was built in 2018 on top of the Ethereum blockchain, the world’s second-largest cryptocurrency project by market capitalization, which makes it compatible with all ERC-20 tokens and infrastructure such as wallet services like MetaMask and MyEtherWallet.
Uniswap is also completely open source, which means anyone can copy the code to create their own decentralized exchanges. It even allows users to list tokens on the exchange for free. Normal centralised exchanges are profit-driven and charge very high fees to list new coins, so this alone is a notable difference. Because Uniswap is a decentralized exchange (DEX), it also means users maintain control of their funds at all times as opposed to a centralized exchange that requires traders to give up control of their private keys so that orders can be logged on an internal database rather than be executed on a blockchain, which is more time consuming and expensive.
How Uniswap works.
Uniswap runs on two smart contracts; an “Exchange” contract and a “Factory” contract. These are automatic computer programs that are designed to perform specific functions when certain conditions are met. In this instance, the factory smart contract is used to add new tokens to the platform and the exchange contract facilitates all token swaps, or “trades.” Any ERC20-based token can be swapped with another on the updated Uniswap v.2 platform.
How to use UNISWAP.
Getting started with Uniswap is relatively straightforward, however, you will need to make sure you already have an ERC-20 supported wallet setup such as MetaMask, WalletConnect, Coinbase wallet, Portis, or Fortmatic.
Once you have one of those wallets, you need to add ether to it in order to trade on Uniswap and pay for gas – this is what Ethereum transaction fees are called. Gas payments vary in price depending on how many people are using the network. Most ERC-20 compatible wallet services give you three choices when making a payment over the Ethereum blockchain: slow, medium or fast. Slow is the cheapest option, fast is the most expensive and medium is somewhere in between. This determines how quickly your transaction is processed by Ethereum network miners.
1. Head to https://uniswap.org
2. Click “Use Uniswap” in the top right-hand corner.
3. Go to “Connect wallet” in the top right-hand corner and select the wallet you have.
4. Log into your wallet and allow it to connect to Uniswap.
5. On the screen it will give you an option to swap tokens directly using the drop-down options next to the “from” and “to” sections.
6. Select which token you’d like to swap, enter the amount and click “swap.”
7. A preview window of the transaction will appear and you will need to confirm the transaction on your ERC-20 wallet.
8. Wait for the transaction to be added to the Ethereum blockchain. You can check its progress by copying and pasting the transaction ID into https://etherscan.io/. The transaction ID will be available in your wallet by finding the transaction in your sent transaction history.
Uniswap’s UNI Token
Uniswaps native token, UNI, is known as a governance token.
This gives holders the right to vote on new developments and changes to the platform, including how minted tokens should be distributed to the community and developers as well as any changes to fee structures.
The UNI token was originally created in September 2020 in an effort to prevent users from defecting to rival DEX SushiSwap.
One month before UNI tokens launched, SushiSwap – a fork of Uniswap – had incentivized users from Uniswap to allow SushiSwap to reallocate their funds to the new platform by rewarding them with SUSHI tokens. This was a new type of token that gave users governance rights over the new protocol as well as a proportionate amount of all transaction fees paid to the platform.
Uniswap responded by creating 1 billion UNI tokens and decided to distribute 150 million of them to anybody who had ever used the platform. Each person received 400 UNI tokens, which at the time amounted to over $1,000.