Uniswap is a leading decentralized exchange (DEX) that has gained a lot of popularity over the past year thanks to the massive growth witnessed within the decentralized finance (DeFi) sector.
In this review of Uniswap, learn about its features, how it differs from traditional exchanges and how one can go about swapping tokens on the platform.
Uniswap is an Ethereum-based automated liquidity protocol designed to allow users to easily buy and trade cryptocurrencies.
Hayden Adams founded Uniswap in 2018, launching v1 after inspiration from a paper on DEXes by Ethereum co-founder Vitalik Buterin. The team behind this popular DeFi platform then launched Uniswap v2 in 2020. The main addition in this version was the introduction of a feature that allows for direct token swaps, removing the need for Wrapped Ether (WETH).
Uniswap transactions happen from smart contracts, which mean that users do not need to go through an intermediary or third party site.
The Uniswap exchange is a standalone platform, but is open source and supports decentralized applications or third-party wallets.
The two main features of Uniswap are Swap and Pool:
Swap: This feature allows Uniswap users to easily swap between ETH and ERC-20 tokens.
Pool: The Pool feature provides a way to incentivize liquidity providers who earn from the collection of fees when other users pay to access the liquidity.
Uniswap also has a feature that allows its users the freedom to connect their account to a supported wallet. For example, users can link to their MetaMask, Coinbase, or Fortmatic wallets by navigating to this option on the Uniswap website.
To connect MetaMask, for instance, go to Uniswap.org and navigate to “Connect to a wallet”. Once you have clicked on this option, select the wallet you want to connect (in this case it’s MetaMask). Choose “Connect wallet” and then “Next” and confirm. You can do this with any of the supported wallets.
Uniswap works unlike the centralized exchange counterparts- there is no central order book for traders. Instead, the exchange uses a feature called liquidity pools.
Each pool comprises two tokens, sent to a smart contract in equivalent amounts and which represent a trading pair.
When one creates a liquidity pool, they also act as the first liquidity provider. The first liquidity provider is the one who sets the pool’s initial price, thereafter based on the formula x*y = k.
X and y represent token balances of each half of the pair – e.g. ETH and USDC. The total is represented by k and accounts for the pool’s constant price.
Uniswap users then swap tokens from within a specific pool, with smart contracts deployed to accept a buyer’s tokens and send them an equal amount of “pool tokens.”
In this way, the system allows every pool to have a constant price.
To incentivize liquidity providers, Uniswap charges a minimal fee for every transaction. The money in each pool (0.3% fee) is then shared among the LPs in tandem with their share of pool balances.
Uniswap launched its UNI token in September 2020, airdropping an initial 400 UNI tokens to every user that had interacted with the network before September 1, 2020.
UNI is a governance token that allows holders to vote on project proposals and other governance issues related to the Uniswap protocol. There will be a total of 1 billion UNI tokens. Currently, the token is tradable as part of various trading pairs in the market.
Other than the UNI token, we have Uniswap tokens referred to as “pool tokens.” As mentioned above, these are tokens that contributors receive whenever they add liquidity to the various pools. For instance, if an individual contributed $20 worth of ETH and $20 worth of a specific ERC20 token, they in return get a “pool token” equivalent to their pool value.
Note that the newly minted token is an ERC-20 token and therefore not different from other ERC20 standard tokens. What this means is that if you hold the “pool token”, you can exchange, move, share, or use them to access and participate in decentralized apps.
The Uniswap pool token represents the liquidity provider’s share in the pool and thus a ratio of the 0.3% trading fees accumulated within the pool.
When a contributor withdraws or reclaims their funds from the pool, the smart contract burns an equivalent of the withdrawn pool tokens.
Swapping tokens on Swapzone is simple:
You can also see how many minutes it would take for you to complete the exchange.