Ethereums DeFi Unicorn
Ever since it launched in 2019, Uniswap has provided the simplest way to exchange Ethereum-based tokens. Uniswap v2 is the second iteration of Uniswap and includes many improvements and features.
Even the interface is simple. Just connect your wallet and then select which tokens and how many you want to swap. Compared to the graphical spaghetti offered by most decentralized exchanges, it’s no wonder Uniswap quickly became one of the most popular Ethereum dapps.
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.
Uniswap v1 vs Uniswap v2
Blockchain innovation never stops and making a good experience even better is the reason that Uniswap v2 has launched. Aside from the different color schemes, the UI is very similar. But there are some subtle changes under-the-hood that are worth discussing.
However, before we do so, it’s important to note that Uniswap v1 remains live and isn’t going away anytime soon. Indeed, in the near future, it’s probably better to continue using it as it has deeper liquidity pools and is more robust as it’s been active for a longer period of time.
Liquidity pools are one of the key changes in v2. It sounds complex, but a liquidity pool is just some tokens a user has put into the Uniswap smart contract, which enables it to work. For example, if I 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 now provide liquidity using two ERC20 tokens; ETH is no longer required. This seems like a small change but provides much more flexibility.
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.
Finally, v2 has better price oracles, which ensure 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.
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.
How to provide liquidity
- Go to Uniswap
- Connect your Web 3 wallet, for example, Metamask, using the top right button
- Click “Pool” in the top left 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 their tokens. This is a one-time fee.
- Supplying tokens requires a transaction. Two transactions basically. And these come with a certain transaction fee.
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