What is UniSwap? An Introduction to one of the most popular Decentralized Exchange
UniSwap is an open-source, decentralized exchange protocol based on the Ethereum blockchain. It allows users to trade ERC-20 tokens. These are the token standard for creating smart contracts on the Ethereum blockchain.
A decentralized exchange (DEX) is a part of decentralized finance or the DeFi ecosystem. DeFi refers to financial services that have been decentralized with blockchain technology. Example services include trading, lending, and borrowing.
If you’re not familiar with DeFi or Blockchain technology, here’s a simplified guide.
UniSwap uses two smart contracts to run the platform. These contracts are the factory and exchange contracts. The factory contract allows the listing of new tokens, and the exchange contract facilitates the trades within the platform.
Launched by Hayden Adams in November 2018, it is currently one of the most popular decentralized applications on the Ethereum platform. Hundreds of thousands of users conduct trades on UniSwap each week.
To become a fully decentralized, autonomous organization, UniSwap launched its UNI token in 2020.
The UNI token
UNI is the native and governance token of the UniSwap platform. It allows holders to influence and vote on development decisions.
UniSwap launched the token through an airdrop. Everyone who previously used UniSwap received 400 UNI tokens for free.
How are trades conducted on UniSwap?
Since UniSwap is a DEX, it does not have an order book or a single entity to manage the exchange. In UniSwap, liquidity pools conduct the trades.
These liquidity pools are a collection of tokens locked in a smart contract that facilitates efficient trading. Anyone can lend their crypto in the liquidity pools in exchange for rewards. These lenders are called liquidity providers.
How is a coin price determined on UniSwap?
Decentralized exchanges use a mathematical formula known as Automated Market Maker (AMM). It determines the price of a particular token.
UniSwap uses a specific type of AMM called the “Constant Product Market Maker Model” to determine the price of coins. This model follows a simple formula of A times B equals K.
A*B = K
This computation means that when trading token A for token B, the amount of token B available on UniSwap should always equal a constant number.
For example, imagine there are 10 ETH and 10,000 DAI within UniSwap’s liquidity pool. Using the constant product AMM model, the number of ETH times, the number of DAI equals 100,000 (constant K).
Now, if you were to buy 1 Eth, this will reduce the number of ETH in the pool to 9. To calculate how many DAI’s it’ll cost you to purchase 1 ETH, you’ll need to divide it by the new number of ETH that is 9. This quotient will give us the number of DAI required to purchase one ETH, in this case, 1,111.
The price is determined by how much of a particular token you want to buy and not by how much someone else wants to get it. This price helps maintain the liquidity in the pool.
How to use UniSwap
On UniSwap, anyone can trade ERC-20 tokens without requiring a sign-up or do KYC. It just requires adding an ERC-20 supported wallet like MetaMask or Coinbase.
When a wallet has been connected, the user will need to add ETH to trade and pay transaction fees. These fees are also known as ‘gas.’
Steps to create your first trade on UniSwap:
- Open https://app.uniswap.org/ in your browser.
- Click on “Connect Wallet” from the top-right corner.
- Log in to your wallet and allow it to connect to UniSwap
- Choose tokens you’d like to swap, enter the amount, and click “Swap.”
- Confirm the transaction.
- Once done, the transaction will appear in your wallet.
Final Words
UniSwap is one of the most most popular decentralized exchanges. It is a popular dApp on the Ethereum platform.
Anyone who wishes to buy and trade cryptocurrencies like $TBC can use UniSwap. Here’s a step-by-step guide on how to buy TBC on UniSwap using Metamask.
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