A Beginner’s Guide to Using Uniswap for Decentralized Trading

Uniswap is the most popular DEX built on the Ethereum blockchain. This article provides a beginner’s guide to using Uniswap for decentralized trading. 

Traders do most of their business on centralized platforms like Coinbase and Binance. 

The exchange company is in charge of these platforms; users must give them control of their money, and they use a standard order book system to make trading easier.

Buy and sell orders are shown on a list, and the total amount is put into each order. This is called order book-based trade. The number of open orders to buy and sell a product is called its “market depth.” 

For this method to work, a buy order must match with a sell order on the other side of the order book for the same amount and price of an asset and the other way around.

On a centralized market, if you wanted to sell one bitcoin (BTC) for $33,000, you would have to wait for someone to come along and buy the same amount of bitcoin at that price or more.

It’s hard to use this kind of system because of liquidity issues. Liquidity here means the number and amount of orders in the order book at any given time. 

People who want to buy or sell may only be able to do so if there is a high volume.

Another way to think about liquidity is this: Let’s say you run a food stand in a street market. If many people buy food and other things at the street market, it is called a “liquid market.” 

People would say the market is “narrow” if it is quiet and few people buy or sell.

What is Uniswap?

Uniswap is a different kind of exchange. It’s fully decentralized, meaning no company owns or runs it. It also uses a relatively new way of dealing called an automated liquidity protocol (see below).

The Uniswap platform was created in 2018 on top of the Ethereum blockchain, the world’s second-largest cryptocurrency project by market value. 

It works with all ERC-20 tokens and infrastructure, like MetaMask and MyEtherWallet wallet services.

Also, Uniswap is open source, meaning anyone can copy and use the code to make their decentralized swaps. People can even list tokens on the exchange for free. 

This is a big difference because most centralized exchanges focus on making money and charge a lot to add new coins. 

Uniswap is a decentralized exchange (DEX), meaning users always have control over their funds. 

This differs from a centralized exchange, where traders have to give up control of their private keys to record orders in a database instead of being carried out on a blockchain, which takes longer and costs more. 

Keeping secret keys safe stops people from losing money if the exchange is ever hacked. 

The newest numbers show that Uniswap is the fourth-largest decentralized finance (DeFi) site right now, with more than $3 billion in crypto assets locked away on its protocol.

How Does Uniswap Work?

The “Exchange” and “Factory” contracts are the two smart contracts that power Uniswap. 

These preprogrammed computer procedures run automatically when a predetermined set of conditions is satisfied. 

The platform’s factory smart contract creates tokens that can be traded via the exchange contract. On the new and improved Uniswap v.2, users can trade any two tokens that use the ERC20 standard.

Since Uniswap is a public standard, multiple DEXs have been launched with the “swap” extension. These protocols are just carbon clones of the Uniswap code. 

They diverge in their respective GUIs and the unique value propositions they present to customers.

Sushiswap is the most well-known and divisive of these imitators. It launched a vampire assault after cloning Uniswap’s code. 

In a vampire assault, a DeFi protocol will entice liquidity providers with enticing rewards. A vampire attack aims to drain funds from the vulnerable protocol.

To what end did Sushiswap’s vampire attack work? The platform began a blitz of advertising. In addition, they simplified the transition process for Uniswap liquidity providers. 

In the end, they paid ridiculously generous compensation to encourage participation.

Pancakeswap is another less divisive scenario. Binance’s Smart Chain hosts this decentralized exchange. Unlike Uniswap, Pancakeswap allows Yield farming and features nonfungible tokens (NFTs).

However, Uniswap is the first DEX to use an AMM model instead of the standard open-book approach. Among other things, liquidity difficulties make the open book approach less DEX-friendly. 

A continuous product market maker model is used instead in the AMM model, which creates a liquidity pool.

It’s important to remember that in v1 of Uniswap, the providers of liquidity pools faced the possibility of short-term loss. In other words, think of v1 as a beta (or possibly an alpha) version of the final product.

Users saw significant enhancements with each new version of Uniswap. Oracles and UNI token airdrops are two examples of features introduced in version 2. 

The Uniswap Decentralized Exchange (DEX) uses UNI tokens as its governance token. You received these tokens as an airdrop if you utilized Uniswap before September 2020.

The most noticeable change in v3 is the increased focus on liquidity. Liquidity providers may now determine the terms under which they would be compensated for this innovative service.

In addition, Uniswap version 3 has been made available on the Positive Ethereum network. Optimism is a second-layer scaling solution that outperforms Ethereum’s first-layer solution by a wide margin. 

Reduced slippage and high gas costs are two of its main advantages, along with lightning-fast transaction times.

Unless exploitable flaws are present, the Ethereum blockchain is highly secure. 

For example, Uniswap was vulnerable to a reentrancy attack due to a flaw in the code, but this issue has been fixed (making Uniswap more secure in the long run). 

Liquidity and trading volume have increased significantly since then.

How to Use Uniswap

To use Uniswap, you only need an Ethereum wallet like Coinbase Wallet and some Ether (ETH) to cover the gas fees. 

To exchange tokens or provide liquidity, go to app.uniswap.org using the app browser integrated within the Coinbase Wallet mobile app or its desktop browser extension. 

Transaction fees (gas) are a problem for customers of Ethereum-based apps, including Uniswap, because their prices can fluctuate wildly. 

Transition to the ETH2 blockchain has been planned at some point (about 2022), and a “Layer 2” scaling solution called Optimism will be released later this year. 

The Optimism update, according to the Uniswap team, will make Uniswap transactions much more cost-effective.

Uniswap v3 went live in early May 2021 to reduce transaction times and fees.

Uniswap’s UNI Token

UNI, Uniswap’s native coin, is a token used to govern the platform. 

In this way, token holders can have a say in how the platform evolves, from how newly generated tokens are allocated to the community and developers to how fees are set. 

To discourage consumers from moving to other decentralized exchanges (DEXs), UNI tokens were introduced in September 2020. 

One month before the debut of UNI tokens, SushiSwap, a Uniswap fork, they offered SUSHI tokens as an incentive to Uniswap users who agreed to transfer their funds to the new platform. 

This novel token granted its holders voting power over the protocol’s development and a stake in the platform’s transaction fees.

In response, Uniswap produced 1 billion UNI tokens and chose to give 150 million of them away to platform users. Over $1,000 was distributed in the form of 400 UNI tokens to each participant.

Is Uniswap Safe?

Even though Uniswap is an excellent addition to the DeFi community, it does have some security problems. 

After Uniswap V2 came out, people in the community tried the protocol in a big way. In July 2020, two months later, people began to worry about fake tokens. 

Since listing tokens didn’t go through pre-moderation, scammers used this weakness to spread tokens that looked like those released by popular DeFi goods. 

By making people buy these useless coins, they lied to them. No one knows how much money has been lost because of these scams, which is a shame. 

Several news stories and reports did, however, talk about these scams.

To fix this problem, Uniswap released a new platform in August 2020 called Token Lists. This decentralized community-led project checks the legitimacy of recently listed tokens. 

And a token is better if mentioned on a more reliable site, like CoinMarketCap or Coingecko.

Ultimately, both the token’s rank and trust number go up. Token producers can use Uniswap’s interface to request the right to list their tokens. 

Lower-ranking codes will act as a safety measure, alerting users to possible theft from their bank accounts.

As part of Uniswap’s ongoing risk management, TRM Labs addresses will now be blocked from interacting with DApp. This means that wallet addresses linked to illegal behavior will also be unable to use DApp.

Conclusion

The Uniswap team has finally found an answer that everyone in the cryptocurrency world has been waiting for a long time. 

Users are also more confident because the protocol is automated and has a unique governing system based on UNI tokens for ownership. 

This makes them use it more, which takes it to a whole new level. With Uniswap, it’s now simple and easy to trade Ethereum-based coins.