A complete and updated guide on the DeFi giant
By diving into the world of DeFi and the various exchanges, Uniswap has a prominent position. Not only is it one of the largest projects in the area, but it’s also an example of a decentralized autonomous organization. What is Uniswap? How can I use it? Which Uniswap version is the best, and how will it integrate NFTs into the ecosystem? That’s what this article aims to explore. So read on and get ready to learn everything about Uniswap.
- What is Uniswap?
- How does Uniswap work?
- Coming soon: Uniswap v4
- What is UniswapX?
- Uniswap NFT Marketplace Aggregator
- Uniswap’s UNI Token
- How do I get started with Uniswap?
- Is Uniswap safe?
- What are Uniswap alternatives?
- Keep tracking Uniswap with DappRadar
What is Uniswap?
Uniswap is a protocol built on the Ethereum blockchain with a peer-to-peer system that allows you to trade cryptocurrencies and non-fungible tokens (NFTs).
It’s not only the first but also the most used decentralized exchange (DEX) on Ethereum, with a total value locked (TVL) of more than $5.18 billion.
Moving towards interoperability between networks and dapps, Uniswap is powered by smart contracts that run on the Ethereum blockchain as well as Polygon, Optimism, Arbitrum, Celo, BNB Chain, and Polkadot via the Moonbeam Network parachain.
Blockchain technology makes every transaction completely secure, transparent, and immutable. On top of that, Uniswap’s code is open source, so anyone can check it and contribute to its development.
How does Uniswap work?
To understand how the Uniswap exchange protocol works, we need to look at how it creates liquidity. In traditional centralized exchanges, when you want to buy or sell an asset, the exchange will find someone on the other side of the trade to match your order. This transaction may take seconds or days or never take place at all.
On Uniswap, there is no order book. Instead, the protocol uses what’s called an automated market maker (AMM) to provide liquidity and act as a counterparty for all trades. The AMM is a smart contract that holds a pool of assets and enables users to trade them without the need for a third party.
It’s important to notice, though, that the Uniswap DEX is always in constant development. Until 2023, the protocol had launched 3 versions with key updates. In June, however, it announced it to be working on Uniswap v4 – bringing updates that would welcome community development.
Each version changed how the entire industry interacts with DeFi transactions and is set to continue working in perpetuity – as long as Ethereum exists. Keep reading to learn more about each Uniswap version.
Launched in 2018, Uniswap v1 was the first decentralized exchange on Ethereum. For the first time, users could trade ETH and ERC20 tokens with each other without the need for a third party.
Even though it is no longer the most used version, Uniswap v1 was a game-changer in the DeFi industry. It proved that decentralized exchanges are possible and laid the foundation for what Uniswap would become.
In a complete redesign of the original exchange, Uniswap v2 was launched in 2020. It improved the protocol in many aspects, such as adding support for multiple assets, flash loans, and staking.
Liquidity pools on Uniswap v2
For example, if you want to swap some ETH for some MKR, then someone needs to have locked some ETH and some MKR into Uniswap to enable this. The reason people do this is to earn a minimal transaction fee. These fees are then shared between everyone who has added liquidity, generating a passive income for those liquidity providers.
In Uniswap v1, users adding liquidity always had to provide ETH and another ERC20 token, but in v2, you can provide liquidity using two ERC20 tokens – ETH is no longer required. This seems like a small change but provides much more flexibility.
Flash loans on Uniswap v2
Other changes include the ability to use liquidity pools to create flash loans. Popularized by the Aave protocol, flash loans mean users can access high values of any ERC20 token in Uniswap cheaply, as long as they immediately pay them back. Again, this seems very obscure, but it’s important to enable greater functionality in the wider DeFi ecosystem.
Price oracles on Uniswap v2
Finally, v2 has better price oracles, which ensures the prices of tokens in Uniswap are more accurate and harder to manipulate.
There are other smaller improvements, which you can read about on the Uniswap blog.
Launched in 2021, the Uniswap v3 is the latest version of the protocol and is currently the most used one.
It builds on the foundations of v2 and brings new improvements to the table, which include:
Concentrated Liquidity on Uniswap v3
One of the main features of this version is the introduction of concentrated liquidity, which allows liquidity providers (LPs) to contribute along specific price ranges. As a result, users can put in range orders, which also improved capital efficiency.
Multiple Fee Tiers on Uniswap v3
Another important change is that now, LPs can specify different fee tiers for their liquidity pool – 0.05%, 0.30%, and 1.00%. This means that they can set margins according to expected pair volatility.
Non-Fungible Liquidity on v3
Furthermore, this protocol version pioneered bringing together the worlds of DeFi and non-fungible tokens (NFTs). In other words, each liquidity pool position you hold becomes an NFT.
Uniswap v3 Launched on Other Networks
Having been until then an exchange protocol based solely on Ethereum, Uniswap v3 innovated by launching itself on the Polygon network and Optimism, a layer-2 solution for Ethereum. These were decisions made by the Uniswap community that will bring many benefits to the future of the protocol.
Coming soon: Uniswap v4
In June 2023, Uniswap’s founder Hayden Adams announced that the DEX was working on plans to release Uniswap v4 – which will be developed with the community’s help.
While Uniswap v3 pioneered a potent approach to liquidity provision, introducing tradeoffs and complexities, it increased costs for users because of its on-chain pricing data through oracles.
The announcement of Uniswap v4 introduced the concept of “hooks.” These are contracts triggered at different stages of a pool action’s lifecycle, allowing for a range of functionalities. With v4, pools will be able to adapt to dynamic fees, implement on-chain limit orders, or function as a time-weighted average market maker (TWAMM), spreading large orders over time.
Uniswap v4’s structure will also reduce costs and increase efficiency through a new “singleton” contract where all pools reside in one smart contract. The blend of hooks and singleton architecture will facilitate fast pool customization and efficient routing.
What is UniswapX?
Announced in July 2023, UniswapX is the platform’s latest beta drop and is already ready to test. UniswapX is an open-source trading protocol specifically tailored for functionality across AMMs and various liquidity sources. The protocol delegates routing complexities to a network of fillers, thereby creating a simplified and more user-friendly ecosystem. Distinctive features of UniswapX include:
- Gas-free swaps
- MEV protection
- The absence of charges for failed transactions.
Additionally, the protocol is planning to introduce gas-free cross-chain swaps. The operating model of UniswapX is uniquely structured, with fillers playing a crucial role. They facilitate transactions by submitting swappers’ off-chain-signed orders on-chain while also assuming the gas costs.
As a result, swappers are not obligated to hold a chain’s native token to initiate trades. Fillers also contribute to addressing the issue of MEV. By competing to offer the best prices, they redirect potential arbitrage-based MEV back to the swappers, which enhances pricing.
At present, UniswapX is in the beta testing phase. Although the majority of orders will initially continue to use classic routing, the system is expected to evolve with the incorporation of more fillers and improved parameterization. Consequently, it’s anticipated that a growing number of trades will be routed through UniswapX, potentially paving the way for more efficient and economical trading.
Uniswap NFT Marketplace Aggregator
Riding the wave of NFTs, Uniswap announced in June 2022 the purchase of the NFT Marketplace Aggregator Genie – a game-changing move across the blockchain industry.
Moreover, since late 2022 you can use Uniswap to trade Ethereum-based NFTs as well as cryptocurrencies.
The Uniswap NFT marketplace aggregator allows traders to get more listings at the best prices from major marketplaces across Web3.
Uniswap’s UNI Token
The UNI token is the native token of the Uniswap protocol. It was created to decentralize the governance of the protocol and give power back to the community. Even though the protocol was launched in 2018, the UNI token only appeared in September 2020 with Uniswap v2.
According to the DappRadar Token Explorer, UNI’s all-time high price reached $43.37 in May 2021 and an all-time low of $2 in September 2020.
Whoever holds UNI can vote or submit their own proposals and participate in the protocol’s governance. Furthermore, holders of the UNI token receive discounts on trading fees. The more UNI you hold, the bigger the discount you’ll get.
Lastly, UNI tokens can be staked to earn a yield in other popular protocols such as Compound.
How Can I Get the UNI Token?
If you want to get your hands on some UNI tokens, there are a few ways to do it. But before that, you must create a digital wallet to store your crypto, such as MetaMask. Watch the video below for more info about it.
Then, you can buy UNI directly with fiat (real-world money) or cryptocurrency on any trusted decentralized or centralized exchange. Keeping your cryptocurrency in your wallet (and not on a centralized exchange account) grants you real ownership of your assets. Not your keys, not your crypto.
You can also buy UNI on Uniswap or using the DappRadar Token Swap.
Another way to get UNI is to provide liquidity to the Uniswap protocol. By doing so, you’ll earn a portion of the trading fees as a reward.
Lastly, you can also receive UNI tokens through airdrops. At DappRadar, you can often get some free and verified crypto airdrops.
How do I get started with Uniswap?
Once you have your web3 wallet set up, you need to connect it to Uniswap. To do that, simply go to the Uniswap website and click on the “Connect Wallet” button. After connecting, you can start trading on the platform or adding assets to a liquidity pool.
Whether you choose to use Uniswap v1, v2, or v3, the process is pretty much the same. The main difference is that v2 and v3 offer more features than the original version – which also explains why they are the most used ones.
How to swap tokens on Uniswap?
Ever since it first launched, Uniswap has provided the simplest way to exchange Ethereum-based tokens.
Even the interface is simple. Just connect your wallet and then select which and how many tokens you want to swap.
In case you’re wondering, Uniswap now uses the v3 interface by default for all swap and liquidity actions. If you still want to use the previous interface, however, it’s also available.
Compared to the graphical spaghetti offered by most decentralized exchanges, it’s no wonder Uniswap quickly became one of the most popular Ethereum dapps.
How to provide liquidity on Uniswap?
If you want to earn some UNI tokens or simply help the community, you can add liquidity to Uniswap. Providing liquidity is as easy as swapping tokens. Here’s a step-by-step guide on how to provide liquidity on Uniswap:
- Go to Uniswap;
- Connect your Web3 wallet using the top right button;
- Click “Pool” at the top of your screen;
- Click the highlighted “Add Liquidity” button;
- Select the two token inputs you want to provide, i.e. ETH and MKR, or DAI and SAND.
- Indicate how much you want to provide. The value of one input is always equal to the value of the second input. I.e. you provide $100 in ETH, and, therefore also $100 in MKR.s
- Click “Supply”
- Liquidity providers must pay a confirmation fee to allow Uniswap to tap into their tokens. This is a one-time fee.
- Supplying tokens requires two transactions basically, and these come with a certain transaction fee.
And remember, all DeFi dapps are experimental and come with risks. Never lock up more value than you’re prepared to lose if something should go wrong.
How to buy NFTs on Uniswap?
Since late 2022, the Uniswap brand expanded from the real of DeFi to the world of NFTs. Now, anyone can use its NFT Marketplace Aggregator to explore the prices of their favorite collectibles in various marketplaces. This makes buying for the best price much easier than manually comparing in different places.
You can also sweep the floor of a collection – that is, choose to spend a certain amount to buy as many of the cheapest NFTs in a collection as possible.
The procedure to purchase NFTs is also very simple. Once you connect your wallet, you simply must:
- Visit the Uniswap dapp;
- Access the NFT Marketplace Aggregator page;
- Explore and choose the Ethereum NFT collection you want;
- Filter, range, and select the NFTs;
- Complete the purchase of NFTs in your bag.
Is Uniswap safe?
The short answer is yes. Uniswap being powered by smart contracts on Ethereum makes it a very safe platform, as all the transactions are transparent and immutable. In comparison with other exchanges and DeFi platforms, Uniswap is also much less likely to be hacked or censored.
However, it doesn’t mean that trading there is easy or damage-proof. As with any other decentralized cryptocurrency project, you are responsible for your own safety and funds. Therefore, you shouldn’t trade with more than you can afford to lose, and always store your tokens in a secure wallet.
Not to mention, you should always be aware of scams maliciously using Uniswap’s name to defraud victims. In 2022, for example, there was a phishing scam that took nearly $8 million in assets from people who thought they were competing for UNI airdrops.
What are Uniswap alternatives?
Uniswap forks such as SushiSwap have risen to prominence on Ethereum. At the same time, copy-and-paste apps such as PancakeSwap and BakerySwap have appeared on Binance Smart Chain, offering users lower fees and faster transactions.
However, Uniswap is still one of the most recognizable brands in the DeFi space, with more than 25 thousand traders per day and a TVL of more than $4.7 billion.
Keep up-to-date on the top decentralized exchanges with the DappRadar Rankings.
Keep tracking Uniswap with DappRadar
Keeping up to date and well-informed on the biggest decentralized finance projects is essential for anyone in the crypto-verse. Now you know what Uniswap is and how it works.
It is up to you to decide how to use this knowledge in your own trajectory, always with caution and research.
DappRadar will continue to monitor top protocols like Uniswap very closely. If you want to learn even more about the best projects in the exciting world of decentralized applications, follow our blog, YouTube channel, and Twitter.
The above does not constitute investment advice. The information given here is purely for informational purposes only. Please exercise due diligence and do your research.