Ȗniswap @𝑬xchange - Swap, Earn, and Build
Last updated
Last updated
Uniswap is a type of decentralized exchange known as an automated market maker (AMM). A decentralized exchange is one that doesn't have a central authority managing orders. AMMs accomplish this by using smart contracts (programs written on the blockchain) to set prices and execute trades. In doing so, they're able to offer decentralized financial services, or DeFi for short.
LEARN MORE: Defining DeFi (Decentralized Finance)
AMMs like Uniswap can provide crypto trading because of their liquidity pools. A liquidity pool is a pool of crypto funds, contributed by users, locked in a smart contract. Funds from the liquidity pool are used when people want to trade crypto.
Uniswap takes a small fee from every transaction and distributes it among a pool's liquidity providers (the people who have deposited their crypto into the pool). It's a mutually beneficial relationship. Uniswap is able to offer crypto trading because of its liquidity providers. The liquidity providers earn crypto because they receive a cut of the exchange's transaction fees.
To use Uniswap, you connect your crypto wallet. After you do that, here's what you can do on the exchange:
Trade crypto: Choose the "Swap" option, then select the crypto you want to trade and the crypto you want to receive.
Liquidity mining: Choose the "Pool" option. You can open a new position and deposit any two cryptos that have a Uniswap pool already. You can also check out the top pools to see which pairs are popular.
There are plenty of crypto wallets available. Options include hardware wallets that keep your crypto offline in cold storage and free digital wallets available as an app or browser extension. Once you have a wallet, you can transfer your crypto there and start using Uniswap.
RELATED: See The Ascent's guide to the Best Crypto Wallets.
Swap Ethereum-based tokens
On Uniswap, you can quickly trade ERC20 tokens, which are any digital assets built on Ethereum (ETH). Since Ethereum is a popular blockchain for launching crypto tokens, there's a massive number of cryptocurrencies you can trade on this exchange.
User-friendly design
Some crypto exchanges have clunky designs and a lackluster user experience. Uniswap was one of the first popular decentralized exchanges in large part because of its design.
The Uniswap app is very user-friendly, so it doesn't take long to learn how it works. It's easy to connect a crypto wallet, swap one crypto for another, or deposit your crypto in a liquidity pool.
Earn crypto with liquidity mining
As an AMM, Uniswap operates using crypto funds from its users. These funds are stored in liquidity pools, with each pool containing a pair of cryptocurrencies.
Anyone can deposit their cryptocurrency into these pools and become a liquidity provider. This is called liquidity mining. Uniswap charges a small fee on every crypto trade, and it distributes that fee among all the liquidity providers for that pool.
Here's an example to show how this works. Let's say you own USD Coin (USDC) and Ethereum. You could deposit equal amounts of each crypto to Uniswap's USDC/ETH liquidity pool. Then, you'd earn crypto every time someone swaps USD Coin and Ethereum on Uniswap.
FULL GUIDE: What Is Liquidity Mining?
Ample liquidity
Liquidity is extremely important for decentralized crypto exchanges. They need plenty of crypto funds to fulfill trades. A decentralized exchange that's low on funds is bad for traders and liquidity providers. Traders may not be able to swap the cryptocurrencies they want. Fewer trades means fewer fees, and the exchange's liquidity providers don't earn as much.
This is where Uniswap's size is a significant advantage. It's one of the largest decentralized exchanges in terms of total value locked (TVL) -- the amount of crypto funds in its liquidity pools. Whether you want to trade crypto or earn interest as a liquidity provider, you likely won't have any problems on Uniswap.
No registration required
If you're tired of going through a lengthy signup process for crypto exchanges, Uniswap will feel like a breath of fresh air. You don't need to provide personal information or create an account. All you do is connect your crypto wallet, and you're ready to trade crypto.
Now, the fact that Uniswap doesn't require any personal information also has its drawbacks. You can't use it to buy crypto with fiat money, and there's the possibility of regulatory issues. But from a convenience and privacy standpoint, Uniswap is great.
Crypto wallet support
To use Uniswap, you connect an Ethereum crypto wallet. It supports many of the most popular crypto wallets, including Trust Wallet, MetaMask, and Coinbase Wallet, among others.
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Doesn't accept fiat money
Uniswap doesn't let you buy crypto using fiat money, such as the U.S. dollar. You must have crypto already in a crypto wallet that you connect to the exchange.
This is common among decentralized crypto exchanges, and it's why many don't require personal information on clients. It's still a big inconvenience. Before you can use Uniswap, you need to buy crypto somewhere else. Many users do so on another crypto exchange, transfer that crypto to a wallet, and then connect the wallet to Uniswap.
COMPARE TOP PICKS: Best Cryptocurrency Apps and Exchanges
Gas fees
Gas fees are the transaction fees charged by a blockchain network. They're also called network fees. Uniswap is built on Ethereum, and its gas fees depend on how busy the network is.
Because of Ethereum's popularity, there have been periods of high network congestion. That congestion drives up gas fees and can make it very expensive to use anything built on Ethereum, like the Uniswap exchange.
While Uniswap developed a reputation for costly gas fees, this isn't always the case. You can see how much a transaction will cost in network fees when you use Uniswap's trade tool.
Risk of impermanent loss with liquidity mining
Liquidity mining is one of the most exciting aspects of Uniswap and other AMMs. Instead of just holding your crypto, you can earn more and grow your holdings. Some liquidity pools even offer APYs of 100% or more.
As you'd expect, there's a catch. Liquidity pools also carry the risk of impermanent loss, which is when the value of your crypto changes from the time you first deposited it. If this happens, you may lose money.
That risk is higher with more volatile cryptocurrencies. These are often the cryptocurrencies where you can earn the highest rates, so it's important not to choose a liquidity pool solely by the potential rewards. Pick out good cryptocurrency investments first, and then see if you can use them for liquidity mining.
Doesn't provide liquidity pool APRs
You won't find an APR for any of Uniswap's liquidity pools in the app. Other popular AMMs, including SushiSwap and PancakeSwap, list the current APRs for all their liquidity pools. Although these rates can and do change often, they at least give you an idea of which pools are paying the most.
No KYC (know your customer) process
Since it doesn't require creating an account, Uniswap doesn't have a KYC process. Whether this is good or bad depends on your perspective.
For investors who want to keep their activities private, exchanges like Uniswap are ideal. The problem is that exchanges without KYC are also more likely to run into regulatory issues. Crypto enthusiasts may appreciate anonymous crypto trading, but their governments and tax authorities don't.
The SEC launched an investigation of Uniswap in 2021. Although the exchange hasn't faced legal issues yet, it and other decentralized exchanges without KYC could be first on the list in the future.
If you want to buy crypto: Coinbase is one of the most popular centralized crypto exchanges, and it offers a great selection of cryptocurrencies. This exchange lets you transfer money from your bank account for cryptocurrency purchases. It's beginner friendly, while also providing plenty of advanced tools for more experienced users.
Uniswap has liquidity provider fees ranging from 0.01% to 1% on cryptocurrency swaps. It distributes the fees from each swap among the liquidity providers for that pair of cryptocurrencies.
There are four fee tiers on Uniswap. They typically correspond to the volatility of the cryptocurrencies in the liquidity pool.
Data source: Uniswap.
To clarify, Uniswap itself doesn't set fee amounts for its pools. Each liquidity provider can choose whichever of the four fee tiers they want when depositing their crypto to a pool.
Uniswap automatically selects the fee tier with the most liquidity when the provider chooses a pool. But they have the option of switching to a different fee tier if they want.
For example, the default fee tier for Uniswap's pool with USD Coin and Tether (USDT) is 0.01%. These are both stablecoins, so the pool is considered very stable.
A liquidity provider could select one of the other fee tiers when depositing funds in this liquidity pool. It's unlikely they'd earn much, though. Users will trade using funds from the many other liquidity providers who are charging less.
Any ERC20 token can be traded on Uniswap. If a cryptocurrency is built on Ethereum, it's either on Uniswap already, or it can be added by creating a liquidity pool for it and depositing crypto funds.
That means there's all kinds of cryptocurrencies, large and small, on Uniswap. The two most notable are Ethereum and the exchange's own native cryptocurrency, Uniswap (UNI).
Since many major cryptocurrencies aren't built on Ethereum, there are also some notable gaps in Uniswap's lineup. The biggest omission is Bitcoin (BTC), although there is an alternative. Wrapped Bitcoin (WBTC) is an ERC20 token backed by Bitcoin and designed to mimic its value.
Your cryptocurrency is safe when you use Uniswap. Your funds aren't actually stored on the exchange at all. You keep possession of them in your own crypto wallet, which means you're ultimately the one responsible for safely storing your cryptocurrency.
There is, however, a different risk to Uniswap and exchanges like it. Because anyone can add a token to Uniswap and start a liquidity pool, it's home to lots of scams and cryptocurrencies of dubious value. While centralized exchanges approve all their cryptocurrencies, Uniswap doesn't have any sort of vetting process.
Scammers take advantage of this, often with a maneuver called a rug pull. Here's an idea of how it works:
A developer creates a cryptocurrency token and keeps a large portion of the initial token supply.
They start a liquidity pool for the token on a decentralized exchange. The liquidity pool contains the scam token and a major cryptocurrency, such as Ethereum.
They convince people to invest in their scam token, often through social media marketing.
When enough people have invested, the scammer converts their tokens to the other, more established cryptocurrency in the liquidity pool.
The price of the scam cryptocurrency plummets, leaving most investors with nothing.
You can lose money on any cryptocurrency, but it's much more likely if you buy into small, unproven projects. It's very crucial to do your research and look out for common red flags, such as lofty claims and aggressive marketing, before getting involved with any cryptocurrency.
