Uniswap Review 2021
Making Crypto Simple
Uniswap stands as one of the most popular and sought after decentralized crypto exchanges on the crypto market today. The platform operates on the Ethereum blockchain and offers users complete anonymity on their trades.
The fact that Uniswap is a decentralized crypto exchange, means that it does not have a central figure or party at the helm and doesn’t require any personal information, data, or verification whatsoever. On Uniswap, users can sell, buy and trade crypto assets with the use of an Ethereum wallet such as Ledger Nano X or Trezor.
The platform functions as decentralized finance (DeFi) entity, in that it provides users with the option to swap decentralized tokens. At the core, Uniswap relies on traffic i.e. constant swaps to keep the liquidity pools full and subsidize token lenders. However, there is much more to decentralized exchanges or DEXs. Let’s take a closer look.
What Are Decentralized Cryptocurrency Exchanges?
When doing business through traditional centralized crypto exchanges, users have to go through the platform’s order book in order to execute a trade.
The order book is a list of orders at given prices that users can choose to engage with if they feel like they fit their needs and preferences. The market liquidity is calculated by the open buy and sell orders at any particular time. A trade is considered as executed when two different parties that have found a matching order between themselves agree to trade their assets at their listed prices.
Basically, centralized crypto exchanges do everything for you. You just have to spot something that you would like to purchase or trade, select it, and leave the rest to the centralized exchange that will do everything that is required for the trade to go through. However, they will administer fees every step of the way. There are deposit fees, trading fees, processing fees and these are just the basic ones. Also, centralized crypto exchanges do store and ask for a lot of personal information that not all users will be comfortable with sharing.
Decentralized exchanges, on the other hand, function through trustless protocols. These protocols do not require a party or a middleman to make trades possible as they are built from the ground up around the blockchain network that they occupy. Here users are able to swap assets and execute trades with the use of an Ethereum wallet. A lot of traders have found this to be more convenient than what the centralized exchanges offer. As a result, the DEX market and Decentralized Finance (DeFi) in general have expanded exponentially and continue to grow at a breakneck pace.
What Is Uniswap?
Uniswap exists as open-source software that employs automated liquidity protocols on Ethereum’s blockchain network. The platform doesn’t make use of a traditional order book but rather refers to its traders as the makers of the marketplace.
The concept is very straightforward. The market liquidity is tied to the offers that are available at any particular moment in time. If there happen to be a lot of takers on a certain listing, then the liquidity on that trading pair is high. Alternatively, if no one is willing to pay the asking price, the seller is forced to either adjust their listed price or wait for someone to turn up that is willing to pay as much as they have asked for their digital assets.
The higher the trade volume on the platform, the higher the liquidity will be on a certain marketplace. The higher the liquidity, the more users will trust the platform with its orders, in turn making it more stable and reliable. On centralized exchanges, it’s the exchange that deals and provides the required liquidity levels for everything to run smoothly. Decentralized exchanges, such as Uniswap, place the traders in charge of the liquidity.
However, if they were to rely on buyers and sellers or takers and makers only, there is a good chance that there will be an imbalance. So, decentralized crypto exchanges almost always employ liquidity providers – traders or entities that are willing to lend their funds in order to raise the liquidity bar and be compensated for their contribution on the back end of trades.
At Uniswap, there are no order listings. Instead, users engage in ERC-20 token swaps without the need for listing fees. The only thing that can interfere with trade, apart from the two engaged parties that are trading amongst themselves, is the platform not having sufficient liquidity to support the trade.
How Does the Uniswap Exchange Work?
The Uniswap protocol came about in 2018 when creator Hayden Adams in relation to the co-founder of Ethereum, Vitalik Buterin came up with a way to bypass order books entirely by introducing the Automated Market Maker (AMM) alternative in the form of the Constant Product Market Maker.
This way smart contracts are programmed from the jump to deal with and navigate the liquidity pools. As a result, traders are enabled to trade, provide liquidity, and deposit tokens from the get-go. This service comes in the form of a maintenance fee that is spread out accordingly between liquidity providers.
The providers improve the platform’s liquidity by making a deposit of two tokens that have the same value. Providers gravitate towards deposits of stablecoins such as DAI, USDC, or USDT. The tokens can be two of a kind, a pair of ERC-20 tokens or ETH and ERC-20 tokens. For their contribution, providers earn special liquidity tokens that represent the shares they have in the liquidity pool.
Uni Tokens: Uniswap v3 and Uniswap LP
Uniswap is a platform that is continuously on the move. They strongly believe in progress through innovation, thus we are now sitting on the third generation of their Uniswap token, known as Uniswap v3. Uniswap v3 was somewhat of a game-changer, in that it made processing a lot more ergonomic and efficient. Its LP tokens allow users to fully customize every facet of their positions when they enter traders that include non-fungible assets. The Uniswap LP token marks every position as an NFT token.
Payment providers such as Aave and MakerDAO are good choices for collateral deposits in the form of Uniswap v2 tokens. Why Uniswap v2? Well, the v2 tokens cannot be customized so they are more valuable as collateral and as a backbone to the platform’s liquidity.
Almost all AMMs have a capital-inefficient role, mainly because of the way they are utilized. Uniswap v3 can also be set towards improved liquidity if and when there is a need for it. Not only that, but they offer liquidity providers the option of programming and customizing the price ranges for which they will provide liquidity on. This is a very efficient way of employing capital because with it users can target the holes in the liquidity pool, without the need to worry or calculate the total liquidity of the pool.
How to Use Uniswap
In order to get started at Uniswap, users need to equip themselves with an ERC-20 wallet. Some of the more popular ones include WalletConnect, MetaMask, Coinbase wallet, Portis, and Fortmatic. By storing Ether in it, traders can take care of blockchain fees and directly participate in trades.
The blockchain or transaction fees are administered in the form of gas fees that are calculated in relation to the network traffic, as well as the processing speed of the miners themselves. Traders can choose three different levels and speeds at which their trades can be processed. The slowest one employs the lowest gas fees, while the quickest one employs the highest gas fees.
How Does Uniswap Make a Profit?
Because Uniswap is running on decentralized protocols, all of its fees are geared towards liquidity providers. The liquidity providers are subsidised 0.3% on every trade. However, that 0.3% do not go directly to their wallets, they are automatically placed back into the liquidity pool. That being said, liquidity providers can call and withdraw their funds to their wallets at a moment’s notice.
A Few Words Before You Go…
Uniswap is one of the best choices on the market when it comes to decentralized crypto exchanges. To get started on Uniswap, all you need is an Ethereum wallet and something in it.
With its Uniswap v3 launch on the Ethereum mainnet, the platform was able to solve the only obstacle that was getting in the way of Ethereum taking over the crypto world – the backlash against the excessive mining on Ethereum 1.0’s blockchain because of its negative effects on the environment.
Yes, the cryptocurrency exchange might not offer direct support for Bitcoin (BTC), altcoins, and fiat currencies, but users need not worry about tedious KYC processes or insufficient liquidity. Uniswap has an excellent infrastructure in place that takes care of all of that. For the latest on Ethereum network developments and Uniswap’s native token, traders can always turn to uniswap.org.
Look out centralized crypto exchanges, there is a new token swapper in town.