Uniswap is a decentralized exchange for trading ERC-20 tokens that has no fees, and offers some of the best liquidity in the market.
So how to trade on Uniswap? Here is how to trade on Uniswap:
- To trade on Uniswap you need to download Metamask or similar wallet to your computer and create an account.
- Once you have downloaded the app, go ahead and select “Uniswap” from within the app’s dropdown menu.
- You will then be taken to a screen where you can enter how much Ether (ETH) you want to use as collateral for trades.
- Next, select which token pairs you would like to buy or sell using a slider that is located on the right-hand side of the screen.
- Once you have selected a desired token pair, you will be taken to a new submenu where your order can be customized for price and quantity.
- The final step before placing an order is selecting “Place Order”.
Trading on Uniswap’s liquidity pools is free for all as long as every user contributes either ETH or stablecoins like DAI and USDT. Their contribution is equivalent to the value of two tokens. Upon doing so, they then receive pool tokens that they may use on other decentralized programs.
If you are interested to know more about Uniswap and how it works, then you are on the right page. Continue reading below for more exciting discoveries.
Uniswap Trading: How it Works
Uniswap is a decentralized exchange program established in 2018 that received praise from a lot of users. In a small amount of time, it became one of the biggest names in the industry. As cryptocurrency continuously gains name and fame globally, we will be maneuvering you over all there is to know about trading on Uniswap and what makes it unique from other DeFi programs.
In contrast to centralized exchange programs, Uniswap’s open-source software allows the trading of ERC-20 tokens without a middleman. This way, both the fees and censorship issues are drawn to a minimum. The main game players are the Liquidity providers, and these are people who get involved in the pools via contribution.
You may also make use of a trading pair for a swap, and for cases like this, a reasonable transaction fee will apply. The amount a user receives will depend on the number of pool tokens they have. The higher the number of pool tokens, the bigger the portion they are to receive.
There is a certain equation that these liquidity pools refer to, and that is: x * y = k
In this equation, the x and y are USDT and ETH, and k is the total liquidity of the pool. According to constant product market makers, or those who are assigned to hold the liquidity pools, the ideal is to keep the k constant and balanced.
In other words, it would be a bad idea if a user buys ETH to swap for USDT through the liquidity pools. This would result in a USDT dominated liquidity pool and would greatly affect the balance of the two as it increases the cost of ETH and, at the same time, decreases the cost of USDT.
One of the many benefits of Uniswap worth mentioning is its user-friendly interface in comparison to other decentralized exchange programs, especially since the users do not have to create liquidity themselves as it already exists as liquidity pools and is available to all.
How is the Token Price Determined?
On Uniswap, determining the token price is done quite differently as it does not use an order book wherein the prices depend on the lowest seller and highest buyer. Instead, the prices are determined by an automated market maker system that adjusts prices according to the program’s supply and demand. Therefore, the changes are dependent on the coin ratio that is present for every pool.
An important detail is that when a user intends to add an ERC-20 token on Uniswap, they have to contribute an amount equivalent to two tokens to start the pool. Depending on the size of the pool is how much token prices might change during a trade: the more liquidity, the fewer chances for price drop even with large trades.
Uniswap vs. Uniswap V2: What’s the Difference?
The great mind that invented the Uniswap is Hayden Adams. According to him, he got his inspiration from the co-founder of Ethereum Vitalik Buterin’s post about automated market makers. Just recently, one of the biggest breakthroughs for Uniswap is its launching of the Uniswap V2, and for this new version, ETH was no longer needed as one of the assets in a pool.
This way, both gas fees, and total transaction number are reduced, given that direct token trading can now be done with ERC-20 tokens themselves. This is good news for many users and those in the Ethereum blockchain because they struggle with the decentralized finance boom.
Other new features offered by the Uniswap V2 are as follows:
- Highly decentralized and hard to manipulate on-chain price feeds
- Technical breakthroughs like Solidity written smart contracts
- Flash swaps, or enabling users to withdraw ERC-20 tokens for leverage or arbitrage
Uniswap: Challenges and Difficulties
The main challenge for users involved in decentralized exchange programs is the competition and risk. Given that the whole industry is a competitive one, just because the program you’re in right now is a popular one doesn’t guarantee that it will stay in the game the following week. There are high chances that another DeFi program would completely dominate over it all of a sudden without you noticing.
A clear example of that is the struggling Ethereum caused by the overflow of new DeFi projects and gas prices. There have been many comments about Uniswap relying on arbitrage trading might mean forever depending on centralized exchanges.
Thankfully, Uniswap does not plan to back down and is currently working on the Uniswap V3. According to Hayden Adams, this version will swallow the Uniswap V2 whole and be a whole new level experience for its users. This will keep the Uniswap ahead in the game.
That sums up everything you would need to know about Uniswap, also hailed as the second-largest cryptocurrency program by DeFi, to give you a heads up on how to trade on this platform. All there’s left to do is to get into the game and get started.
To buy UNI Tokens as a start, you have three options: Binance, BitPanda, and Kraken. Binance is suited for Canada, Australia, UK, and Singapore, BitPanda for European residents, and Kraken for US residents. Once you decide which option is most convenient for you, then you are ready to explore the platform.