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?
Uniswap is a protocol built on the Ethereum blockchain with a peer-to-peer system that allows you to trade cryptocurrencies.
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 $4.77 billion.
Uniswap is powered by smart contracts that run on the Ethereum blockchain. Thanks to this technology, every transaction is 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 2022, the protocol had launched 3 versions with key updates. Each of them changed the way 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 version of the protocol was a pioneer in bringing together the worlds of DeFi and non-fungible tokens (NFTs). In other words, each liquidity pool position you hold becomes an NFT.
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.
1/ The Uniswap Universe is expanding 🦄— Uniswap Labs 🦄 (@Uniswap) June 21, 2022
In pursuit of our mission to unlock universal ownership and exchange, we’re excited to share that we’ve acquired @geniexyz — the first NFT marketplace aggregator — expanding our products to include both ERC-20s and NFTs 🧞♂️ pic.twitter.com/vESlbE3kvy
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.
Uniswap v3 is still in development, and new features are being added all the time. You can stay up to date with the latest news on the Uniswap blog.
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 $44 in May 2021 and an all-time low of $1.03 in September 2020.
Whoever holds UNI can vote or submit their own proposals and participate in the governance of the protocol.
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. The first step, however, is to create a web3 wallet like MetaMask.
The second 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.
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 tokens and how many 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.
- Click “Supply”
- Liquidity providers need to pay a confirmation fee to allow Uniswap to tap into the ir tokens. This is a one-time fee.
- Supplying tokens requires a transaction. Two transactions basically. And these come with a certain transaction fee.
And remember, all DeFi dapps are experimental and come with risk. Never lock up more value than you’re prepared to lose if something should go wrong.
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 were competing for UNI airdrops.
- Read more: How to Avoid Getting REKT in Crypto & DeFi
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.
Continue Learning About 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.