Learning how to use Uniswap will allow you to learn more about decentralized finance (DeFi). Nowadays, that’s an important thing to know as cryptocurrency and blockchain technology continue to change our world. Understanding such services can provide a sneak peek into the rising new age of finance!
It’s okay if you’re a bit iffy about these concepts, as they seem like a combination of the stock market and new technology. If you want to thrive in the coming years, you will have to adapt by learning such ideas. Fortunately, I wrote this article to teach you how Uniswap and decentralized finance function.
I’ll start by explaining what DeFI is, and then I’ll talk more about Uniswap as a decentralized exchange and as a cryptocurrency. I’ll explain how it makes buying and selling certain crypto coins easier and how the UNI token helps with that. Later, you’ll learn how to use it yourself, so you can see for yourself how the system works.
What is Decentralized Finance (DeFi)?
You might know by now that Bitcoin is the first cryptocurrency ever. Someone known as Satoshi Nakamoto launched it in 2009 to create a form of money for the people.
In other words, he wanted a currency that didn’t rely on banks and governments to function. Instead, it runs on a decentralized computer network called a blockchain.
This is made up of computers owned by regular people. They confirm each exchange made with bitcoin (BTC) to earn more of it in return.
This concept has grown a lot after so many years. We now have more cryptocurrencies, and we can do so much more with the tech. Specifically, we’ve developed decentralized finance (DeFi).
🚀 2021 has been a transformative year for crypto adoption.
🎆 Total market cap crossed $3T, scaling solutions came online, NFTs drove art and music, DAOs empowered collective action, gaming tokens took off, and more!
— hayden.eth 🦄 (@haydenzadams) January 1, 2022
Here are what makes DeFi crypto services great: these are financial applications powered by blockchain, so they have features that make them better than the old system.
- Open – You can access them wherever you are in the world.
- Non-custodial – No bank or government handles your money, so people have full control over their assets.
- Transparent – You can see where the money is going. DeFi runs on crypto networks that record transactions on a public ledger that everyone can view.
- Composable – You may build on top of other DeFi apps with your upgrades, or you may copy their codes to build DeFi projects yourself.
What is Uniswap (UNI)?
What does DeFi have to do with Uniswap? It’s a decentralized exchange (DEX) platform, one of the major parts of DeFi as a whole. Hayden Adams launched it on November 2, 2018.
Uniswap lets you buy and sell cryptocurrencies without leaving them on the platform. Instead, you get to keep it on your digital or physical ethereum wallet.
This platform specifically makes it easier for people to trade ERC-20 tokens. Before we go any further, I’ll clarify the difference between a coin and a token.
A crypto coin has a network, such as bitcoin (BTC). Meanwhile, tokens run on top of other networks, such as the ERC-20 tokens on the Ethereum blockchain.
It’s the second-largest cryptocurrency in market cap, and it’s the number one go-to for smart contracts and NFTs. Uniswap runs on this network, but how does it work?
It uses an automated market maker (AMM) to get the trades going. The AMM uses smart contracts to determine the token prices based on supply and demand.
Uniswap offers the tokens in trading pairs in a liquidity pool. The supply of coins allows traders to buy and sell these cryptos. Later, I’ll explain how you can earn from it.
This allows Uniswap to prevent slippage, a phenomenon where there are not enough buy or sell orders to meet buyers and sellers. Let’s say you want to buy ETH on Uniswap.
If it doesn’t have an AMM, you may have trouble finding sell orders that could meet your purchase. As a result, you don’t get to buy ETH at the price you want.
Read More: Should You Invest In UNI Tokens?
What is Uniswap v3?
What’s great about the crypto space is that it always improves. Over the years, bitcoin and other cryptocurrencies have gained upgrades and features, especially Uniswap.
That’s why we have Uniswap v3, the update that offers major changes to the platform. It changes a lot about how Uniswap works, so you’ll have to read this part.
The v3 upgrade offers capital efficiency, NFT representation, and a layer 2 scaling solution. Read further to learn more about each feature:
- Capital efficiency – The v3 lets traders only provide a coin supply to a specific price range. This full liquidity allows them to spend fewer coins.
- LP tokens as NFTs – It allows non-fungible tokens or NFTs to represent the tokens of a liquidity provider. In turn, they could deposit LP tokens as collateral in other DeFi services like MakerDAO. We’ll talk more about liquidity pools later.
- Layer 2 scaling – As I said, Uniswap runs on top of the Ethereum network. This means its smart contracts can take more transactions every second while still having the security of the ETH network.
👀 Uniswap v3 has been deployed to @0xPolygon after working its way through Uniswap governance!
— hayden.eth 🦄 (@haydenzadams) December 22, 2021
How can I trade on Uniswap?
- Go to app.uniswap.org to enter Uniswap.
- Get a digital wallet like MetaMask or a cold wallet like the Ledger Nano X.
- You’ll see the page with the Swap tab selected already. If not, click on it.
- Then, click the Connect Wallet button to link yours to Uniswap.
- Click the drop-down menu of the top text box to pick a token and the amount you want to use.
- Then, do the same for the bottom text box to determine the token you want to turn it into.
- Click Confirm on the pop-up window that will appear.
- Wait for your trade to push through on the ETH network.
Note that you will have to pay for swap fees. They are like the transaction fees, trading fees, or GAS fees in other cryptos, but they come in three levels: 0.05%, 0.30%, and 1%.
The one you’ll have to pay will depend on the trading pair. This allows all of them to charge the right amount, unlike before when they had a 0.30% swap fee.
How can I earn cryptos from Uniswap?
— Uniswap Labs 🦄 (@Uniswap) January 1, 2022
You can help Uniswap work by adding to its liquidity pool. In exchange, you may earn more of the cryptos you deposited. You may start by following these steps:
- Go to app.uniswap.org.
- Click the Pool tab.
- Click the Add Liquidity button.
- Choose a trading pair, such as ETH/USDC.
- Enter the amount you want for each token.
- Select the Add Liquidity button.
- Confirm it using your crypto wallet.
You’ll earn based on the trading pair you chose. For example, pick one with a 0.05% swap fee, and you’ll earn that much for each trade made with this pair.
What are UNI tokens?
Are you wondering why I placed Uniswap’s native cryptocurrency as a sort of side note? It’s because you don’t need them to start using the platform.
UNI tokens are governance tokens, so holding them lets you vote on changes to the network. You’ll have to provide 1% of your tokens to submit a proposal.
If you want to vote, you need 4%. For example, you’ll need to delegate 400 UNI tokens if you have 10,000. Click here to learn more about it.
Now that you know how to use Uniswap, you should think hard before using it. Make sure you have an investment plan before using Uniswap or any other DEX.
If you just want to learn, though, you’re just getting started. That’s the great thing about cryptos; they keep improving, so you don’t stop learning.
If that sounds like a hassle, don’t worry. You can read the other Inquirer USA articles to get the latest cryptocurrency updates.