What is Uniswap? How does Uniswap aim to solve the liquidity problem of decentralized exchanges? Which tokens can be traded or exchanged on Uniswap? How are Uniswap tokens created? What are the pros and cons of Uniswap?
What Is Uniswap in Simple Words?
Uniswap is an Ethereum based exchange where anyone can exchange ERC20 tokens. It is an Ethereum protocol for exchanging ERC20 tokens without the need for buyers and sellers to generate demand, and without platform fees or intermediaries. This is done using an equation that automatically sets and balances costs based on demand, as well as a pool of tickets and ETH.
Advanced crypto exchanges solve many of the issues of central exchanges, and this includes hacking risks, poor management, and arbitrary charges. On the contrary, decentralized exchanges mainly face unique issues like low liquidity, due to the lack of money circulating in the exchange, and this implies slower and less efficient processing of transactions.
This is where Uniswap comes in. Uniswap aims to solve the liquidity problem of decentralized exchanges by allowing exchanges to exchange tokens without relying on buyers and sellers to create liquidity.
What’s So Special About Uniswap?
Any token can be added to Uniswap by funding it with an equivalent value of ETH and the ERC20 token being traded. For example, if you wanted to make an exchange for DXF Token, you would launch a new Uniswap smart contract for DXF Token and create a liquidity pool with, for example,$10 worth of DXF Token and $10 worth of ETH.
Instead of connecting buyers and sellers to determine the price of DXF tokens, Uniswap uses a constant equation:
X * Y = K
In the equation, X and Y represent the number of ETH and ERC20 tokens available in the liquidity fund and K is a constant value. This equation uses the balance between ETH and ERC20 tokens, as well as supply and demand, to determine the price of a specific token. Every time someone buys the DXF token with ETH, the DXF token offer falls and the ETH offer rises – and the price of DXF token goes up.
As a result, Uniswap’s token price can only change when a trade is made. Uniswap balances token cost and exchange cost based on how many people want to buy and sell it.
All ERC20 tokens can be listed on Uniswap. No permission is required. Each token has its contract and liquidity fund. If it doesn’t exist, you can easily create it. If the token has its exchange contract and liquidity fund, anyone can buy tokens or contribute to a liquidity fund for a 0.3% commission. ETH and ERC20 symbols of equal value are required to contribute to a liquidity fund.
You can make use of DXF/ETH trading pair on Uniswap.
How Are Uniswap Tokens Created?
Each time a new ETH/ERC20 token is deposited into the Uniswap liquidity pool, the participant will receive an ERC20 token, a „pool ťoken“. Pool tokens are created when money is deposited into the pool, and with ERC20 tokens, full tokens can be freely exchanged, moved, and used in other decentralized applications.
When the money is claimed back, the pool token will either be burned or destroyed. Each pool token stands for the user’s share of the pool’s total assets and the pool’s transaction fee of 0.3%.
How to Redeem Tokens With Uniswap
The Uniswap protocol can be accessed through the interface of the Uniswap exchange. For example, to use a wallet like MetaMask, you need an Ethereum address.
Equipped this way, you can redeem tokens or add tokens to the Uniswap Liquidity Fund. It is about choosing the token you want to exchange, and the token you want to receive. Then you need to approve the transaction with your wallet and confirm the exchange (don’t forget the extra Ethereum exchange fee).
Since Uniswap is an open-source protocol, many front-end user interfaces have already been created. For example, InstaDApp allows you to add money to your Uniswap pool without accessing the official Uniswap user interface. An interface like Zapper.fi allows you to add money to your Uniswap pool using ETH instead of ETH and other tokens. This interface also provides a simple solution for buying full tokens along with the bZx token strategy (the bZx protocol is a set of smart contracts built on top of Ethereum.).
Launch and Airdrop of UNI Tokens
Uniswap V2, released in May 2020, brought ERC20 directly to the ERC20 stock exchange and added several technical improvements. In September 2020, Uniswap released the UNI Governance Token and distributed it to anyone who used the protocol before September 1. In September 2020, Uniswap launched UNI and as part of the airdrop, platform users received 400 UNI tokens. This was a staggering $1,200, considering that UNI was trading for around $3 a piece at the time.
The UNI token is intended to allow holders to participate in the governance of the Uniswap protocol. The more UNI a person has, the greater the influence they’ll have to vote or oppose any proposals that will affect the Uniswap protocol.
Of the 150 million UNI tokens airdropped, approximately 66 million were claimed within the first 24 hours after distribution. Following the 40% of tokens issued in the first year, 10% points are deducted annually until all tokens are issued.
Uniswap plans to deploy a limited 1 billion UNI over four years, of which 60% is for community distribution, 21.5% is for Uniswap employees, and the remaining 18.5% is for investors and advisors.
As a control signal, UNI provides the holders with Uniswap governance, UNI community finance, change protocol fees, Uniswap standard list, and liquidity tokens (SOCKS).
The High Volume of Transactions Due to Liquidity Provider Incentives
Liquidity providers charge all fees (excluding gas) for Uniswap token swaps. Each liquidity provider can earn a lot of ETH and ERC20 tokens proportional to the share of the total pooled fund.
Requirements for Liquidity Providers
Liquidity providers do not require a minimum deposit, so this option is available to everyone. Liquidity providers wishing to add or withdraw funds to the Uniswap Liquidity Fund can do so at any time for a GAS fee.
Anyone can see Uniswap’s liquidity funds for all listed cryptocurrencies in real-time. This not only helps potential liquidity providers to understand which assets are popular, but also allows traders to know if market orders (swaps) can be 100% filled.
You can trade over 200 ERC20 tokens. One of the biggest benefits of Uniswap is that it allows traders to trade directly from their wallet without verification. The platform doesn’t store money; it’s safe because there is no money in the protocol. The permissionless exchange design makes it quick and easy to get new tokens.
ERC20 to ERC20 Exchange
Uniswap allows sellers to easily exchange all tokens based on the ERC20 standard.
Relatively Low GAS Rates
Uniswap has the lowest GAS transaction fees of all DEXs (but the fees are still usually higher than on centralized exchanges).
DEX typically uses smart contracts that can only send money sold in the same wallet. The Uniswap Send feature allows traders to exchange assets and send them to another wallet in one transaction.
High Transaction Fees
The GAS fee price is still very high (which has to do with the generally high GAS fees on the Ethereum blockchain).
Uniswap’s exchange interface is basic, and there are no individual price tags for the cryptocurrencies listed. Advanced mapping is required using an external service such as TradingView.
Uniswap requires liquidity providers to deposit ETH and ERC20 tokens at a 1:1 ratio. When a supplier removes liquidity, the relationship can become unilateral depending on the market demand of the trader.
Ethereum Blockchain Assets Only
Uniswap currently does not support crypto assets that are not based on the Ethereum blockchain.
Swapping at the Wrong Time
Making swaps at the wrong time can lead to loss of profits, especially if the market crashes.
How Is Uniswap Monetized?
Uniswap pays fees to liquidity providers, usually at 0.3% on the transaction value happening in each pool. These fees are subtracted from the exchanged value on each transaction, not paid directly from the fees paid through gas fees. But in many transactions, Uniswap itself is the major liquidity provider, pocketing the majority of those fees.
As with all asset transactions, once the exchange is complete, the token can be exchanged for another token or for the original investment to take advantage of price fluctuations caused by dramatic changes in the total liquidity of each pool.
However, there is a significant risk of loss with these strategies, since prices are not always transparent, liquidity can change rapidly depending on the size of the order, and trades fail and you can spend ETH for no reason.
How Safe is Uniswap?
Uniswap is generally considered a secure decentralized exchange for cryptocurrency trading. The token exchange is very safe as there is no need to store money. However, complaints about fake or bogus tokens began to be filed on the Uniswap Exchange in July 2020. Since anyone can hold tokens on Uniswap, and the decentralized nature means there is no authentication process, scammers can easily create tokens with similar names to popular DeFi platforms and trick consumers into buying such tokens.
Why Is Uniswap So Popular
Uniswap is the world’s most popular decentralized exchange, where anyone can issue tickets or provide liquidity to their platform without having to carefully register and verify their identity.