Uniswap launched in 2018 on the Ethereum blockchain. Its Ethereum base means it supports ERC-20 tokens and all popular wallet systems like MyEtherWallet. In addition, Uniswap is based on Automated Market Makers (AMMs) tools that allow users to “trade” tokens based on pairs, making trading more accessible.

The programs encourage users to deposit their tokens in groups, with the price of each pair reflecting demand. As a result, tickets with buying pressure are priced high, enabling people to pool their liquidity at the market maker.

For example, if ETH is more in demand than BTC, the ETH-BTC pool will see its price rise, encouraging users to deposit their ETH to supply.

In other words, buyers spend their BTC to get ETH. It is a simplified explanation of how decentralized exchanges work.

What Future Potential does Uniswap Have?

Decentralized exchanges have become more popular as users evolve more aware of cryptocurrency.

Their advantages have attracted more users since they are considered safer and allow trades for all kinds of token pairs. Uniswap has several other benefits, one of them being that it is open source

So anyone can create their decentralized exchange based on Uniswap’s code.

Token listings are free of charge, which encourages all crypto projects to get listed on the platform and, in turn, fuels the growth of Uniswap.

As a product, Uniswap is a good offering for a market looking to mature in the future.

How does Uniwap Work?

The Uniswap protocol is inspire by Vitalik Buterin’s on-chain Automated Market Maker (AMM) concept. Uniswap primarily uses the Constant Commodity Market Makers Model pricing mechanism, a variant of the automated market-making system that holds liquidity pools for traders to trade with.

Later, in May 2020, Uniswap introduced the updated version— Uniswap V2, along with liquidity pools.

Unlike its predecessor (V1), in which users could exchange between ETH and a single ERC-20 token, the new version V2  uses a “wrapped” ETH ( wrapped Ether or wETH) in the central contracts, where users can pool ERC-20 tickets directly with any other ERC-20 tokens. In addition, prices have become extra reliable and harder to manipulate.

Liquidity pools are reserves locke in a smart contract, which liquidity providers usually finance.

How does Uniwap Work? Step by Step

Uniswap is a decentralized automated market-making exchange (AMM) on the Ethereum blockchain.

The Uniswap protocol remains made up of a series of smart contracts that contain pairs of tokens. These smart contracts allow operators to exchange any ERC-20 token with each other.

In Uniswap, there are three main parts:

Liquidity Providers (“Lps”)

Add assets to Uniswap pools (the reserves) and receive liquidity shares called “Pool Tokens” as compensation. They can create new collections, add liquidity to existing pools, and remove tokens from the pools they contribute to (by sending lp shares).

Traders

Are people looking to trade two tokens (for example, buying KNC with USDT). Then, they pay the swap fee, which is effectively add to the KNC/USDT pool reserve.

Arbitrators

monitor any price deviations with other trading venues (e.g., Binance) to profit from this. It imposes an efficient pricing mechanism at the group level.

Uniswap Retrospective

In 2016, the creator of Ethereum, Vitalik Buterin, proposed the creation of a  decentralized exchange  , in combination with an “automated on-chain market maker.” In his  Reddit post, he also shared some technical details on how that could be achieved.

A former Siemens mechanical engineer, Hayden Adams, took that idea and started developing a fully functional platform: Uniswap. Shortly after submitting the idea to him, the project received some grants and $100,000 from the Ethereum Foundation. Soon after, the first version was officially launch in November 2018. Subsequently, in April 2019, Paradigm (a digital skill asset company) provided $1 million for the further development of Uniswap.

How does Uniswap Make Money?

Uniswap does not profit from end-user fees, merchant fees, or any other means commonly applied in the world of blockchain technologies. Instead, the fees paid by users are a reward for liquidity providers. These liquidity suppliers receive 0.3% of all transaction fees that the fund contract takes on a transaction.

However, the commission is calculate proportionally to the influence of each provider. For example, if a provider donates 10% to the liquidity pool for the DAI/ETH pair, the provider earns 10% of the fees collected. As a liquidity provider, you can add those fees back to the fund to increase your future earnings or withdraw your current earnings at any time.

How to Exchange Tokens Using Uniswap?

The procedure of exchanging tokens on Uniswap is straightforward. To convert an ERC-20 token to another pass, you need an Ethereum wallet and also, internet connection. Since it is an open-source protocol, anyone can use this code to implement it in a self-made application. Another alternative is to access it through the native Uniswap application.

Here is a step-by-step guide on how to trade tokens on Uniswap:

  • Open the Uniswap app.
  • Connect your ERC-20 compatible wallets such as Metamask and Trust Wallet, or a hardware wallet such as Trezor or Ledger Nano S.
  • Select the pair of tokens you need to exchange and click ” Swap. “
  • In the pop-up window, appraisal the transaction details and settle the appeal in your wallet.
  • You can follow the status of your transaction on Etherscan while you wait for confirmation.

Conclusion

The Uniswap team has made a solution that the crypto community has remained to wait for for a long time. Also, being an automate liquidity protocol couple with a unique governance system using UNI staking tokens, users feel more confident and have taken usage to a new level. With Uniswap, trading Ethereum-based tokens becomes easy.