The Decentralized Finance market is one of the largest segments of the blockchain-based economy and certainly one of the most attractive venues for monetization and passive income generation. The sector has been attracting throngs of users with its vast functionality that allows them to stake their assets or place them into liquidity pools in exchange for rewards. Among the many protocols and automated market maker exchanges that have taken a significant foothold on the market is the Uniswap exchange, a major player on the AMM arena. The biggest question that usually arises in the minds of all users who have heard of the possibilities offered by the Uniswap exchange is how to use Uniswap. Another, more important question, that should be explored is what is Uniswap in the first place and how to buy on Uniswap native assets that give access to the exchange’s many functions. However, the core understanding of what an AMM is and what it offers can be found in exploring how Uniswap works.
Uniswap is a new breed of decentralized exchanges that works in a completely decentralized fashion without any centralized authority or governing entity. This allows the exchange to be free of ownership and encompassment within a single entity. This also gives Uniswap the ability to operated as an Automated Liquidity Provider. Uniswap itself started off in 2018 as a solution built using the Ethereum blockchain network. This means that all ERC-20 and other compatible standard tokens are operable on Uniswap. The Uniswap protocol is fully open source, which implies that its code is open to anyone with enough coding experience to copy and build solutions that would allow users to issue their own tokens and list them on Uniswap for free.
The Uniswap exchange is not profit-driven as most centralized exchanges, meaning that all commissions on it are lower than on other venues. Another important benefit is that the decentralized nature of Uniswap allows all users to retain control of their funds and balances, meaning the platform is essentially non-custodial. The added benefit of the decentralized approach is speed, which Uniswap can boast in full, making all transactions on it faster than on centralized exchanges. The risks are also lowered by the decentralized nature of Uniswap, since the chance of it being hacked is minimal and the fact that all user private keys are in the custody of the users means that their wallets are safe. At present, Uniswap is one of the leading decentralized exchanges on the market with a capitalization and turnover reaching around $3 billion according to the latest estimates.
The Uniswap exchange is automated and works using two major types of smart contracts – the Exchange and the Factory contract. These smart contracts regulate all operations on the blockchain of the exchange and are responsible for transfers of tokens and the addition of new assets to the list. The The availability of liquidity on the Uniswap exchange is one of its biggest advantages, since it is regulated in an automated fashion.
The exchange operates automated liquidity pools to solve the shortage of liquidity by attracting users to add their own assets to pools in exchange for a percentage of transaction commissions. The assets listed on the exchange are allocated dedicated pools, which users contribute their corresponding assets to and generate passive income as the exchange uses their assets to conduct trades. A series of complicated algorithms govern the prices of the tokens in the liquidity pools, setting fair market-level exchange rates. The availability of the assets in the liquidity pools means that users do not have to wait for matching trades to appear as they place their own. The lack of an order book makes this possible, as users trade against liquidity pools, not individual other traders. This means that trades are instantaneous and no downtime is involved. When placing their assets in pools, the users are given liquidity pool tokens in exchange for each asset. The LP tokens can then be redeemed for rewards accrued over a period of time. There is a set 0.30% fee for every trade on Uniswap that is then automatically transferred to a liquidity reserve fund. Users have the option of withdrawing their assets at any time by returning the LP tokens and receiving their assets. The returned LP assets are destroyed once redeemed.
The Uniswap V2.0 upgrade increased the stakes to 0.05% of every 0.30% trading fee being sent to a Uniswap fund for financing all future development initiatives. Prices on tokens are determined without the use of an order book. This means that prices are determined by the highest buyer and the lowest seller, essentially the supply and demand curve. The automated market maker system used by Uniswap allows the application of changing exchange rates on assets stored in pools, as well as adjustable yield ratios on staked liquidity. Another important element of Uniswap is arbitrage, or arbitrage traders, who specialize in scouring prices for discrepancies. These traders match prices across exchanges and use them to make a profit. By finding differences in various trading prices on tokens across the market, arbitrage traders make a profit on that difference by adjusting prices and making sure that market averages are maintained.
The Uniswap exchange is very straightforward when it comes to usability, but it does require users to have a connected wallet that supports ERC-20 standard tokens. Among these are MetaMarks, Coinbase wallet, Portis and some others like WalletConnect. Users who have connected their wallet to Uniswap will then need to have some amount of ETH to make sure they can pay the gas fees for transaction processing. The higher the speed of processing – the higher the gas price.
Sometimes, the Ethereum network can be congested in peak times of market activity, meaning gas prices can be significant. This increase results in lower earnings as traders have to pay much to have their order processed. With the ETH added to the wallet, users can then go to the Uniswap website and log into their wallet to select the token they wish to swap. With that done, they enter the amount they wish to swap and click on the Swap button to execute the trade. The transaction will then be added to the Ethereum network and processed accordingly, and that may take some time. The Uniswap exchange also has its own native UNI governance token, which gives holders the right to partake in voting. The votes are usually made on development vectors and other proposals submitted about the Uniswap exchange and its operation.
The main benefits of using Uniswap reside in the fact that it boasts a high degree of liquidity and various fee tiers that give a wide range of users access to the decentralized finance market. The low entry threshold means that Uniswap can be considered a very popular and democratic system that does not constrict users with high commissions, unlike centralized exchanges that focus on generating revenue and profit on transaction commissions. The straightforward design and the streamlined, hassle-free operating model means that the Uniswap exchange website is accessible to even the most novice users of cryptocurrencies.
The fact that it is secure and non-custodial also removes the fear of theft and fraud that casts a long shadow of doubt on centralized exchanges that have been the victims of hacks for years. Another core benefit of Uniswap is the higher capital efficiency, which results in higher yields on assets contributed into liquidity pools. Since users can simply stake their assets and receive passive income, this means Uniswap is the venue of choice for those who do not want to partake in trading, but want to reap the benefits of DeFi by contributing to its operation in a passive way. Low slippage and high flexibility in trade execution also place Uniswap well above its competitors in terms of operating efficiency, which is only augmented given its high liquidity availability.
The benefits of these features are: higher capital efficiency and greater returns, low slippage trade execution and greater flexibility for liquidity providers. The time-averaged prices and availability of arbitrage on Uniswap also places it well above other platforms in terms of fairness and transparency, which is only bolstered by its open source nature. The oracles Uniswap uses are also easy to integrate and have no requirements on recording any historical values, considering the real-time nature of the Uniswap exchange.
Uniswap is one of the leading automated market makers on the decentralized finance market, which offers its users a broad variety of possibilities for swapping, trading, and liquidity pooling. Combined, these features make Uniswap the go-to solution for DeFi users seeking to capitalize on the new market’s opportunities.
With its many features and built-in benefits, Uniswap is the venue of choice for traders seeking favorable prices on their trades and quick processing times with low commissions. However, the fully decentralized nature of the exchange makes Uniswap a highly risky venture when it comes to regulation and other issues related to legislation. The lack of a legal entity and a centralized authority means that users risk losing all of their funds if the Uniswap exchange is ever hacked or banned in any jurisdiction. Centralized exchanges may be highly-regulated, but they are legal in most jurisdictions and offer the return users’ funds in case of any attacks.
Also you can read about Uniswap Listing