A Beginner’s Guide to UniSwap (UNI)

Uniswap is a decentralized exchange that has been gaining traction in the crypto world and decentralized finance (DeFi) space. It differs from other exchanges in its ability to more seamlessly facilitate trades, including large trades, through its use of liquidity providers and liquidity pools. In this post, we will explore UniSwap, what makes it different, and how it works.

What is UniSwap?

Currently, the majority of trading takes place on centralized exchanges. These platforms are governed by a central authority. In order for these platforms to make money, they often charge fees on trades that occur on the platform.

The funds are under the control of the platform. If you’re using a reputable exchange, this may not be a problem. The problem, though, is a lack of liquidity. If a seller wants to sell a coin at a certain price, they need to wait for a buyer to be ready to purchase at that price.

This is where UniSwap comes in. A fully decentralized exchange (DEX) that utilises a new type of trading protocol to facilitate easier trading.

Who created UniSwap?

UniSwap was created in 2018 by Hayden Adams, a former mechanical engineer. He was the first person to write a smart contract that allows UNI token traders to exchange tokens with each other in an automated fashion, without needing any third-party liquidity providers or exchanges. Since 2018, UniSwap has become the largest decentralized exchange in the world!

How does UniSwap work?

UniSwap utilises two smart contracts: an exchange contract and a factory contract. Smart contracts work by automatically performing an action when certain conditions are met, without the need for an intermediary to enforce them.

Automated liquidity protocol

The exchange contract facilitates the exchange of UNI tokens from one user’s wallet into another’s in a peer-to-peer fashion, with no middlemen involved at all. It allows users who own UNI to stake their tokens and become liquidity providers.

These users pool their funds together to create liquidity within the exchange and in return, they are rewarded with small transaction fees. There are different liquidity pools for all of the different tokens that are listed on the platform, which is what allows for the more seamless execution of trades.

Setting token price

Because the UniSwap network is decentralized and has no controlling authority it begs the question: how are the prices actually set? Well, the platform uses an automated market maker system.

A tried-and-true mathematical equation is used to calculate the price of an asset. Also, the price of a coin is adjusted according to the proportion of coins in the pool.

For example, Valentina wants to utilise the ETH/MANA Uniswap liquidity pool to trade Ether (ETH) for Decentraland (MANA). Valentina adds a large number of ETH to the pool, which raises the proportion of ETH in the pool compared to MANA. So as a result, the cost of MANA increases, and the price of ETH decreases. This means as Valentina deposits more and more Ether into the pool, the fewer MANA she’ll get as it becomes increasingly expensive.

Balancing

Because prices can be so influenced by the investments and withdrawals of individuals, it’s important that there is some kind of moderation so certain tokens aren’t skewed too dramatically one way or the other.

This is where arbitrage traders come in. Their aim is to determine any tokens trading dramatically outside their market price and buy and sell accordingly to correct balances within the pool.

What are the risks of UniSwap?

Like any platform, UniSwap is not risk-free. There are a few things to keep in mind. And as with any financial decision, do your own research prior to investing.

Slippage

Though arbitrage traders hedge against this, slippage can occur when pools are imbalanced. Keep an eye on market prices when choosing pools to invest in.

Smart Contract Failures

Smart contracts are not without faults. Because they’re the core of the platform, they’re also a target for people attacking the UniSwap protocol.

How to get started with UniSwap

Getting started with UniSwap is fairly straightforward. You’ll need the MetaMask wallet (a plugin that acts as an Ethereum wallet) and ETH or any other Ethereum tokens (ERC-20 tokens) that run on the Ethereum blockchain.

Then, you connect your wallet to UniSwap, choose the tokens you wish to swap (what you want to sell and what you want to buy), and UniSwap will do the rest.

What is UNI?

UNI is the native utility and governance token of the UniSwap exchange. It’s the fuel that powers UniSwap. Users need to pay a small fee in UNI whenever they trade on the platform. This is known as paying for liquidity and ensures that there are enough providers of UNI tokens who wish to sell at any given time.

As a governance token, UNI allows holders to participate in UniSwap governance. This means that users who hold UNI can vote on new upgrades or proposals to improve the UniSwap platform.

UNI can also be used as the base trading pair. For example, if someone is looking to buy UNI tokens for ETH, they can do so by using UNI/ETH or vice versa, buying UNI with ETH.

How to buy UNI

If you’re just interested in the UNI token for investment or other purposes, you can buy it independently of the UniSwap platform. UNI is available on a variety of cryptocurrency exchanges, such as Swyftx.

Summary

UniSwap is one of several decentralized exchanges (DEXs) that provides an alternative to traditional crypto exchanges. It is one of the frontrunners in the decentralized finance (DeFi) space. UniSwap works by using liquidity providers and liquidity pools (bundled funds from multiple users) to provide the capital to facilitate larger or more frequent trades. UNI is the native token of UniSwap and can be bought independently of the platform.