Have you heard of the popular Ethereum based exchange named Uniswap? This article is all about how to use Uniswap. Uniswap is a decentralized exchange created by two smart-contracts built on the Ethereum blockchain and public, open-source front-end client. The on-chain market maker allows the easy swapping of ERC20 tokens including ETH to ERC20, vice versa. The platform allows any user to contribute for any ERC20 token. Additionally Uniswap allows users to then receive commission in the form of exchange fees.
Uniwap prioritizes decentralization, censorship resistance, and security as it is an open-source software licensed under the GPL. The platform aims to eliminate the middleman: it allows users to effortlessly contribute to the exchange’s liquidity by exchanging ERC20 tokens and Ethereum (ETH). Anyone with an Ethereum address can be a liquidity provider for a liquidity pool. This is done by depositing a value of each underlying token in return for pool tokens.
How Uniswap Works?
Let’s look at the above illustration to see how Uniswap works! As you can see, there is a pair of tokens in the “Liquidity Deposit” box. This pair of tokens serves as the automated market makers. They are ready to accept one token for another as long as the “constant product” formula, x*y = k, remains. Under this formula, product, k, must not be changed by the reserved balances,x and y; thus,k must remain unchanged from the trade, as it is often invariant.
A desirable property of the “constant product” formula is that larger trades (relative to reserves). These trades are settled on exponentially worse rates than smaller trades. Uniswap applies a 0.3% fee to trades, adding it to reserves. Each trade, therefore, will actually increase “k”. This will function as LPs which are realized when pool tokens are burned to withdraw a portion of total reserves. In the future, the fees may change to 0.25%, with 0.05% withheld as a protocol-wide change.
The Two Fundementals of Uniswap:
There are two major components to Uniswap, and they play a crucial role in the proper functioning of the platform.
One of Uniswap’s main features is that it allows users to freely swap between Ethereum (ETH) and other ERC20 tokens.
Uniswap’s pool feature allows users to earn through providing liquidity. This is achieved when deposit tokens into smart contracts. Then the user receives pool tokens in return as a reward for those deposits.
So What Makes Uniswap so Popular? Is it a Scam?
Multiple features have made Uniswap skyrocket in popularity, including:
Users have full custody over their own funds, reducing risks of hacking or bankruptcy of centralized exchanges.
No KYC (Know Your Consumer) Process:
As a decentralized exchange, Uniswap does not require a KYC process that is usually mandatory when using centralized exchanges. This means you can start right away. Furthermore you can be less worried about giving any personal information to a centralized entity that may be compromised.
Low Trading Fees
Uniswap charges a 0.3% flat fee per trade. This is drastically lower than many centralized exchanges and even other decentralized exchanges.
Access to New Cryptos
The usual process for new coins to get listed on centralized exchanges requires vetting, which often takes too much time. In contrast, projects can choose to directly launch tokens on Uniswap which allows users faster access totokens firsthand. Especially with the often explosive rise in price after an initial launch. Being able to access the early launch is an advantage to many users.
Of course, Uniswap is not without some disadvantages:
The two major disadvantages of the platform are transaction failure and potential fake coins.
When swapping coins on Uniswap, there is the possibility of a transaction failing. This can be caused by several reasons such as: (1) insufficient amount of gas fees paid causing the transaction to take longer than the deadline encoded, (2) the price of the token right before completion of the transaction exceeding the specified maximum price you indicated you would be willing to pay per token, and (3) insufficient liquidity in the pool. In these cases, your transaction will be “reverted” and resetted as if it never occurred, allowing you to still keep your funds.
With the easy accessibility of Uniswap, it allows some users to list fake coins in hopes of scamming other people. So in a case like this, Uniswap users should be careful of fake coins and make sure to double check before completing a transaction.
Continue reading to learn some tips that you use to avoid falling into traps of fake coins.
So how can you get started?
Uniswap is special in that it allows users to directly connect to their exchange. Users with any of the following wallets–Metamask, WalletConnect, Coinbase Wallet, Fortmatic, and Portis–are able to utilize the platform. Below is a step by step process for how you can get started:
- Once you have your wallet setup, you can go on Uniswap and click “Launch App” and then “Connect to a Wallet”
- You can then select whichever wallet that you want to use on the platform
- A popup window will appear showing your account and all you need to do is click “next” and “connect” and you’re all set!
- Now once you have connected your wallet, you can start to swap
- On the swap tab, you can choose the amount and token that you would like to swap for *note if your token is not listed, you can also paste in the address of the token
- Uniswap will then provide you with an estimate amount of tokens you will receive after the swap (look at image 1)
7. To confirm the swap, simply click “confirm swap” (look at image below)
8. After confirming the swap, another window will popup showing the amount of gas prices that will need to be paid (look at image below)
9. After the transaction is completed, Uniswap will then provide you with a link on Etherscan to show all your transaction details. In this window you can see the amount of tokens you will get out of the swap and amount of fees paid
Tricks and Tips for Faster Transactions
As mentioned before, failed transactions often occur on the platform. Whenever a failed transaction occurs, users will lose the Ethereum gas fees paid. So one way to avoid this is by looking at other people who are attempting a similar transaction. You can simply do this by clicking “…” on Uniswap, then go to “Analytics”. Then search for your intended trading pair to see how many other people are attempting a similar swap. For example, if the price of a token you want to swap for is increasing in value. You can then increase the gas fees to speed up your transaction. This will allow you to beat competitors into locking into a better swap price.
Another tip that is extremely useful in faster Uniswap transactions is outbidding your competitors. This can be done by paying more gas fees than other people, you can check out https://ethgasstation.info/ for the most up-to-date information regarding Ethereum gas prices. You can pay 10% more than the recommended price for fast transactions to ensure your transaction occurs.
Tips and Tricks to Avoid Fake Coins
Because the Uniswap platform is so easily accessible, any coin/token can be easily added onto the platform. This allows a lot of scam coins being listed on the exchange. With cryptocurrency transactions being irreversible, a scam will likely result in you losing any funds you send to a wrong address. Fake coins often mimic the logo and sticker of real coins. They try to trick users into falling into possible traps. In order to avoid this, you should always check the legitimacy of the token and the accuracy of the token/contract address on cryptocurrency tracking websites like https://www.coingecko.com/en. At the bottom of the page you will see the trading pairs and will be automatically taken to Uniswap with the token address being imported (check below image for more details).
Another way to check if a token is genuine is by checking on Etherscan. Once again on Coingecko, you can find the token and click on etherscan.io explorer. On the Etherscan webpage, you will see the contract number for the token. You can then match the contract number with the one in the address bar in your web browser for Uniswap. *Note: do not search for the token or its address on Etherscan, you should always check Etherscan via coingecko or a project’s official website. The main reason for this is because Etherscan includes ALL coins so it also includes the fake tokens.
Adjusting for Slippage Tolerance
Slippage in trading occurs when the price at which the order is executed does not match the price confirmed at the time of transaction. This is often expressed as “slippage tolerance” and is expressed as a percentage. With some tokens or coins that have high prices, there will be a lot of competition to process the transaction and get the token. To increase your chances of your transaction being processed faster, you can increase your slippage tolerance. To adjust the slippage tolerance, you can simply click on the gear icon that is located on the top right-hand corner on the Uniswap browser. Once you adjust your slippage tolerance, you will see a decrease in the minimum amount guaranteed to be sent to you. This means that it will decrease the potential of you receiving more cryptos but increasing chances of your transactions actually going through.
Uniswap Liquidity Pools
Uniswap has various liquidity pools that are essentially a pool of various tokens sitting in smart contracts. Users can use their Ethereum to exchange for tokens in the pool. One of the main features of Uniswap is that anyone can create pairs of exchanges in the pool. This is unlike centralized exchanges that only offer trading pairs dictated by the exchanges. Note that for liquidity pools, you will need to deposit an equal value of Ethereum and the token you want to participate with. So for example, if you are participating in an ETH/USDC pool, you will then need to provide equal amounts of ETH and USDC into the pool. The funds will then be traded by people and result in fluctuations in the ETH/USDC ratios. This is due to if someone wants to sell ETH for USDC, they can then access your liquidity pool.
This whole process is known as “Automated Market Making” (AMM). With this method, there will be a higher ratio of USDC compared to ETH in your pool. So the liquidity pool you can think of as basically a scale that is correspondent to what other users may need. The main reason why liquidity providers do this is because they can receive a liquidity provider fee from those conducting swaps in their liquidity pools. As mentioned earlier, the platform charges a 0.3% flat fee for each transaction and this transaction fee will be split among all the liquidity providers in the pool dependent on their contribution. And of course, there are many other liquidity pool providers out there, and many people are looking for the pools that earn the most profit. A good website to find all these pools is https://pools.fyi/#/ .
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