Bitcove Blog

News and updates from the Ireland's leading cryptocurrency exchange

06-06-2021

Uniswap

Uniswap is a protocol for automated token exchange on the Ethereum network. The Uniswap exchange is an open source, decentralized platform that allows users to swap ERC20 tokens in a trustless environment (meaning users don’t rely on anybody to govern swaps). Uniswap also allows users to earn money by providing liquidity to token reserve pools. Note: Anybody can submit an ERC-20 token to be available for swap on Uniswap. Ensure you carry out adequate research before swapping, especially if trading a smaller, less known token/coin.

How does Uniswap work?

Most exchanges maintain an order book and facilitate matches between buyers and sellers. As mentioned above, Uniswap smart contracts hold liquidity reserves of various tokens. New trades/swaps are executed against these reserves, voiding the need for “the other side” in each trade. The funds in these pools come from users (anybody can add to these pools) who voluntarily provide liquidity to the network in exchange for a share of the exchange fees incurred during trades (liquidity providers receive a proportional share to the amount of funds they’ve contributed). Asset prices are set automatically using the constant product market maker mechanism (pre-programmed algorithm), which keeps overall reserves in relative equilibrium.

The Uniswap platform has no sign up or KYC requirements. Anyone, anywhere can quickly swap between ETH and any ERC20 tokens

How can I start using Uniswap?

Before using Uniswap you’ll need an Ethereum based wallet. Our recommended wallet of choice is Metamask. If you’re not yet familiar with this, check out our Guide To Using Metamask.

Step 1: Connecting your wallet to Uniswap

  • First, visit Uniswap.org
  • Click Use Uniswap on the top right of the page.
Uniswap
  • On the next page click Connect to a wallet. Again, this is on the top right of the page.
Uniswap
  • Click Metamask. If you have trouble connecting your wallet, revisit our guide to using Metamask.
  • Type in your password and click Unlock.
Uniswap
Uniswap

Now that you’re signed in you’ll see your wallet address in the top right corner along with your available balance in Ether. Clicking on your wallet address will bring up the screen shown below where you can copy your receiving address to your clipboard. This mitigates the chance of making an error if sending your address to another user. Clicking anywhere on the screen will bring you back to the Uniswap landing page. Note: only ERC-20 tokens can be received to this address. Sending incorrect protocol tokens to this address may result in loss of funds.

Uniswap

Step 2: Understanding what Uniswap has to offer

Now that we’ve successfully connected our Metamask wallet we will run through the various functionalities offered by Uniswap. These can be found at the top of the landing page: 1) Swap, 2) Pool, 3) Vote and 4) Charts.

1) Swap

Once signed in, the trading interface will appear. Here you can select what tokens you would like to swap. The gear icon the top right corner allows you to adjust the transaction settings. Here, the Slippage Tolerance (allowed difference in expected price and received price) and Transaction Deadline (maximum time allowed before pending transaction is abandoned) can be adjusted. For beginners, we recommend leaving these settings at default.

Uniswap
Uniswap

In this example, we will swap ETH for the Uniswap native token - UNI.

  • To do so, select ETH from the top drop down menu. Users can browse swap options by clicking Select a Token. All available tokens can be found here. Remember: anyone can submit an ERC-20 token to be swapped. Ensure you research each token you wish to purchase prior to swapping to avoid scams and highly volatile coins.
  • Click on the token you wish to swap for.
Uniswap
Uniswap
  • Enter the amount of the base token (token you own) you wish to exchange. In our example you can see we wish to exchange 0.1 ETH. We will receive roughly 6.8 UNI in return.
  • Click Swap
  • Next your Metamask wallet will open with a summary of the swap details. If you are happy with them click Confirm. Gas fees represent the transaction fees associated with the swap - these vary based on network congestion.
Uniswap
  • Once you click Confirm, your transaction will be processed. Once complete your new tokens will appear in your ERC-20 wallet. You’ve now completed your first swap on Uniswap!

2) Pool

Unlike typical exchanges where buyers are matched with sellers. Uniswap uses liquidity pools to govern transactions. Users contribute their tokens to a pool (e.g. ETH-USDC), when another user wants to purchase either token their transaction is taken straight from the pool. Contributors are known as liquidity providers (LPs). Transaction fees are divided proportionally among pool contributors based on how much they’ve assigned to the pool. This method aims to ensure that swaps can always be made even if there is a lack of buyers/sellers of a given token.

Anybody can contribute their funds to pools in return for transaction fees (note: pooled funds always belong to the contributor and can be withdrawn at any time). We strongly advise users familiarise themselves with liquidity pools before engaging with them. This guide is intended for educational purposes only, further research should be conducted prior to depositing funds.

  • To begin the process of adding liquidity click Pools on the landing page on Uniswap. Next, Click New Position.
Uniswap
Uniswap
  • To add liquidity to a certain pool you will need to possess both tokens. Select your preferred pair from the drop down menus. We have selected ETH and USDC in the example above.
  • Next select preferred fee tier flexibility.

The 0.05% fee tier is ideal for token pairs that tend to trade at a fixed or highly correlated rate, such as stablecoin-stablecoin token pairs (e.g. USDC-USDT). Liquidity providers take on minimal risk in these pools but earn less fees.

The 0.30% fee tier is best suited for less correlated pairs such as ETH-USDC which are subject to big price movements both to the upside and downside. Higher fees are more likely to compensate LPs for the increased risk of holding more volatile pairs.

The 1.00% tier is designed for exotic pairs, where LPs take on extreme price risk.

  • Next LPs need to select a price range in which to provide liquidity. Price range options will vary based on the fee tier chosen by the LP. Uniswap will offer the ability to adjust prices in either 0.10%, 0.60% or 2.00%. These correspond to the 0.05%, 0.30% and 1.00% fee tiers respectively.

LPs won’t earn transaction fees if the price moves outside these set limits. Earnings won’t continue until price moves back within these ranges.

Uniswap
  • LPs submit their desired deposit amounts. By default, any figure entered for one token will be matched to the equivalent value for the other (e.g. if ETH = 2687 USDC: when a user enters 1 into the ETH section, 2687 will be automatically filled into the USDC section). LPs can choose to deviate from a 50/50 portfolio balance by adjusting Select Price Range parameters.
  • Once satisfied click Approve. Metamask will open with a summary of the transaction with an addition of a gas fee. Click Confirm to continue.

Although it is possible to profit from adding funds to liquidity pools, be sure to research the risks involved when providing liquidity. A thorough guide to Liquidity Pools can be found here on the Uniswap website.

3) Vote

Uniswap is a decentralized platform where users have the ability to participate in the governance of the site. Proposals for potential changes to how the site operates are found in this section. Once a proposal has reached the voting stage it represents real, executable code which will alter the functionality of Uniswap Governance. Uniswap’s native token “UNI” is what controls voting. UNI holders allocate their funds either for or against each motion. 1% of the total UNI tokens need to be cast in favor to submit a proposal, 4% needs to be cast to pass a vote (tokens aren’t lost during voting). This model incentivizes user engagement and promotes users to hold the native Uniswap token. A more in depth look at how Uniswap voting works can be found here.

Uniswap

4) Charts

Here users can view statistics related to specific tokens on the Uniswap network or the network as a whole. Metrics include: TLV (Total Locked Value this refers to the amount of assets that are currently locked as liquidity on the Uniswap network), Volume 24h (total value that has been swapped on the network in 24 hours) and more.

Uniswap
Uniswap


Still having trouble with Uniswap or other cryptocurrency related platforms? Email support@bitcove.ie for more help.

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