Today, decentralised exchanges are enjoying great success in the crypto market, although only a few years ago they were treated with less reverence. Today, we take a microscopic look at one such DEX exchange that is gaining momentum and threatening to become the new king of decentralised finance. The name of this trading platform is Uniswap. It is one of the leaders among all decentralized platforms, as it accounts for over 70% of the total trading volume on the DEX market. In this review, we will look at the features of Uniswap, including the mechanisms and technologies used, as well as the pros and cons of the platform.
What is Uniswap?
Uniswap’s DEX exchange is based on smart contracts (Ethereum blockchain) and has a public client with open frontend code. The Uniswap application is compact and allows exchanging ERC20 tokens into Ethereum (and vice versa). Exchange users can make their own contribution to the liquidity pools of any ERC20 tokens, earning bonuses in the form of exchange fees. The platform’s underlying kino is Ethereum.
Any ERC20 token, including ETC, can be exchanged on Uniswap without intermediaries. In this way, any user with an ETH address can ‘feed’ the furnace of the exchange’s liquidity. In addition, the platform has its own UNI token for internal use. At the time of writing (January 2021), this token is ranked 27th in terms of market capitalisation according to CoinGecko. Uniswap has been successfully listed on various cryptocurrency platforms, including Binance, Huobi Global and OKEx.
How does Uniswap work?
Transactions on any of the pairs traded on Uniswap are done instantly and clients do not even need to register and verify themselves. All activities on the platform are performed without the supervision of any centralized authority. Smart contracts and liquidity pools were used to implement such a scheme.
Smart contracts are programs on a specific blockchain whose operating principle is written down in advance. All of the items in a smart contract algorithm are executed in a strict order, with no possibility of deviation from the prescribed conditions. However, certain conditions must be met for smart contracts to work. Uniswap has adapted such contracts for cryptocurrency exchanges – thanks to them, all transactions on the exchange are automatic without human involvement.
But there are disadvantages to this approach. For example, due to the same smart contracts, the cost of exchange may become completely inadequate and exceed $30. If a user wants to buy a little-known kino for the ETC equivalent of $10, he will have to pay about thirty dollars for the transaction, regardless of the transaction size. Such scenarios on Uniswap are quite possible, though rare. Typically, exchange clients pay no more than $5-8 for exchange transactions.
The second pillar of Uniswap is liquidity pools, which allow clients to earn rewards when they deposit funds. Assets can be either deposited or withdrawn at any time from each ERC20 exchange contract. It is not possible to add ERC20 tokens without crediting an equivalent amount of ETH. The official Live Exchange service can be used to calculate the right amount in ETNs. There, the user needs to specify the amount of etherium to deposit and the software will immediately show the equivalent in ERC20 tokens according to the current exchange rate implied in the contract. After such a swap, a separate fee is charged. This amount is then split between liquidity providers, but not equally, depending on the deposit size of each participant in the transaction.
When depositing virtual assets, coins equivalent to the amount of your deposit must be added to the liquidity pool. These will be used to determine your share of the pool. For example, if you want to enter the ETH/USDT pool, you will need to deposit an equivalent amount in ETH and USDT. You can check the amount of your liquidity tokens using the Etherscan service.
How to connect a wallet and start trading on Uniswap
The good thing about Uniswap is that you can work there without having to register, which makes it similar to traditional cryptocurrency exchanges. There are a number of simple steps you need to take to get started:
- Go to https://uniswap.org/;
- In the top right corner, click on the “Launch App” button;
- Synchronise your personal Ethereum wallet with the exchange interface. To do this, click “Connect to a wallet” and then select one of the wallets offered.
One of the most popular options for Uniswap is the MetaMask wallet, the benefits and features of which we covered in our review. If you don’t already have one, you can easily fix that. To connect MetaMask to Uniswap follow these steps:
- Install the MetaMask extension in your browser;
- Start MetaMask and select the “Create new wallet” option;
- A mnemonic phrase will be generated for you, which you will need to memorise and keep in a safe place. The same applies to your wallet password.
When your Uniswap wallet is ready, connect it to the site by simply clicking on the ‘Connect to a wallet’ option, then fill in your password or synchronise to unlock the wallet. Once this procedure is completed, your balance and address will appear in the top right corner of the Uniswap interface – you can now make transactions on the exchange.
By default the service will ask you to work with ETN (the “From” line), but there is nothing stopping you from choosing any other available token. MetaMask is “on your toes” with the ether blockchain, it supports all ERC20 tokens. For the token to appear in the interface of your wallet, you need to add it there manually. To work with ERC20 tokens, you must select the “Ethereum Mainnet” network.
Standard ERC20 tokens will be available on the “Ethereum Mainnet” network. To add BER20 tokens, you will have to use custom (advanced) search. For example, renBTC, renZech and renBCH tokens can be used for Ethereum and Bitcoin, Zcash and Bitcoin Cash transactions. After selecting a token, all you have to do is specify the desired amount (to be received) and the software will calculate the amount of the transaction. If the terms of the transaction suit you, you can safely make the exchange.
Advantages and disadvantages of Uniswap
The service is popular with crypto-enthusiasts and has already built up a loyal user base. We will try to briefly explain the main reasons for this popularity by listing why customers like Uniswap so much.
Pros of Uniswap
- No verification – Uniswap clients do not have to prove their identity in order to use the services. No matter how active you are on the exchange or how much you trade, no one will ever ask you for scans or photos of your identification documents. The platform uses smart contracts and attracts users by the absence of total control by the administration.
- No registration – forget about creating an account, linking your email, etc. On Uniswap there is no registration as a given, there is no system at all with accounts and personal accounts.
- Fast exchange – unlike traditional exchanges, on Uniswap you don’t have to spend a lot of time executing orders. All transactions are almost instantaneous. The speed of the exchange depends only on the amount of commission, which is then distributed between the liquidity pool participants.
- Large selection of tokens – the number of options available for exchange far exceeds the competitive offerings. Since any token can be poured in here, new coins often appear here that have not yet reached the major exchanges. For savvy investors, this is another good earning opportunity.
- Simple interface – even beginners can easily get to grips with the principles and mechanisms of Uniswap. Transactions on the exchange are processed in a couple of clicks.
Cons of Uniswap
- Even with all the above advantages, Uniswap is not a perfect service. It has a number of shortcomings that cannot be ignored.
- Too expensive to exchange (in some situations) – the procedure involves smart contracts, which require more gas (the currency to pay for transactions in the Ethereum blockchain) compared to conventional transfers. Typically, the transaction costs around $5, but if the Ethereum network is overloaded, the price can exceed a few tens of dollars.
- Need to develop a strategy – with high commissions, you can’t trade everything indiscriminately. You need to decide on a precise set of tokens, as well as volumes and investments.
- This is a free-for-all for fraudsters – any token can be added to the platform, which is often used by cybercriminals and all sorts of petty crooks. Their favourite trick is to pour in tokens with the same ticker symbol so that inattentive investors will buy up fakes instead of the original.
- It is not a platform for big purchases – large cryptocurrency trades are not very profitable because of the premium mechanism. However, trading small amounts of cryptocurrency thrives here.
- Fee contingencies – users of such resources make a profit by playing on changing exchange rates and reselling tokens. To speed up the exchange process, a higher gas price is often charged. This is reflected in the overall level of fees.
Uniswap is the next evolution of cryptocurrency exchanges. It operates in a decentralised way and has been successful. It is easy to use, runs smoothly, and offers a huge selection of tokens. However, Uniswap generously absorbs resources of Ethereum network and in general requires more balanced approach for successful operation, especially if we compare it with other cryptocurrency exchanges.