Uniswap is a decentralized exchange that offers hundreds of tokens. It uses liquidity pools to support the trading of these assets. It is essentially a tool used to quickly and easily trade cryptocurrency without a middleman or 3rd-party source.
What is a Decentralized Exchange (DEX)?
A decentralized exchange (DEX) is an exchange that allows for the direct peer-to-peer trading of tokens on the blockchain. This differs from a traditional exchange such as Coinbase or eToro in that there is no central company that oversees the transactions. Traditional exchanges are subject to know-your-customer (KYC) laws, whereas DEXes are not. Simply put, DEXs allow users to trade crypto without a 3rd party.
Automated Market Makers Explained
Uniswap utilizes liquidity pools to allow users to trade any of the hundreds of supported tokens with ease. A liquidity pool is a crowdsourced pool of funds that are used to support the trading of assets. When someone makes an order, liquidity is taken from these liquidity pools to execute the trade..
This is similar to the way market makers operate in stocks. Market makers are firms that submit large amounts of orders on a particular stock so that it can constantly be traded. With liquidity pools, the orders are able to be constantly traded from users placing funds in a liquidity pool.
Market makers are a centralized version of liquidity pools. Liquidity pools do not require a firm to support trading volume, decentralizing and automating the process. Liquidity pools also allow users to earn fees for staking their funds.
Uniswap Versus SushiSwap
Uniswap is just one example of a DEX. SushiSwap is another DEX. While the 2 interfaces appear very different, there are only a few small differences between them. In fact, Uniswap creator Hayden Adams accused SushiSwap of copying Uniswap’s technology. One difference between the 2 DEXes is the fees paid to liquidity providers. Uniswap offers 0.3%, while SushiSwap offers 0.25% and an additional 0.05% paid to SUSHI token holders as dividends. Uniswap also unveiled concentrated liquidity positions, which allow users to store liquidity in non-fungible tokens (NFTs). The two platforms are very similar, with a few slight differences.
How to Use Uniswap
Uniswap can be a great tool to stake funds and trade trustlessly and permisionlessly. Getting started on Uniswap is also very simple, requiring just a few steps.
1. Buy Ethereum from an exchange.
The 1st step in getting connected to Uniswap is buying Ethereum (ETH) from a crypto exchange. Because Uniswap is based around the Ethereum network, buying ETH is the easiest way to start using Uniswap. While there are many exchanges to buy Ethereum, there are a few that stand out because of their low fees, simple interfaces and speed of transactions.
Coinbase provides an easy approach to investing in cryptocurrency. It is also easy to send cryptocurrency across the blockchain, which will be important later on. Some other options for exchanges are Gemini.com and Crypto.com. After you create an account on an exchange, you can link your bank account and send funds to your account. Then, you use the funds to purchase ETH.
2. Send ETH to your Ethereum wallet.
The next step in using Uniswap is to send your Ethereum to a wallet. A wallet differs from an exchange in that it is a place to store cryptocurrency, while an exchange allows for the buying and selling of cryptocurrencies. A great choice for an Ethereum wallet is MetaMask.
MetaMask is a wallet that allows you to store, send and buy cryptocurrencies. You can also use hardware wallets, like Ledger. When you open a MetaMask account, you will be assigned a wallet address (usually a long string of numbers and letters.) This will be the address you will send your Ethereum to. On your exchange, navigate to your Ethereum position. From there, you should see an option to send your ETH. Click on this and enter the address from your wallet. Hit send, and your ETH should be in your wallet within a few minutes.
3. Connect your wallet to Uniswap.
Once you have a wallet containing ETH, you can navigate to Uniswap’s app. In the top right, there will be an option to connect the wallet. Click this, and choose from the handful of supported wallets. If you are using the MetaMask chrome extension, you should be able to log in automatically. If you are using another supported wallet, you may have to enter in some information. Once you have connected a wallet to Uniswap, you are ready to begin using the technology.
4. Make your trade or provide liquidity.
The 2 primary functions of Uniswap are to make trades and provide liquidity. To make a trade, you simply select the amount of ETH and what token you would like to swap it with. You can choose from hundreds of currencies so there is a good chance you can find the token you want to swap for. If you would like to provide liquidity and stake your crypto positions, navigate to the “Pool” tab on the top of the screen. Here, you can select a currency pair such as ETH and Aave (AAVE) or Tether (USDT) and Dai (DAI) to provide liquidity for. Some currency pairs offer different fee tiers, so make sure you find a fee tier and currency pair you are comfortable with.
Concentrated Liquidity on Uniswap
Uniswap V3 unveiled concentrated liquidity. Before V3, users simply added funds to the pool, and the funds were distributed evenly along a wide range of prices. V3 allows users to choose a range of prices to provide liquidity for.
For example, the USDT and DAI pair required the most liquidity between $0.99 and $1.01. However, because the funds were distributed over a wide range, only 0.5% of funds were used to provide liquidity. Now that users can provide liquidity over a selected range, the funds can be used more efficiently.
Trading on Uniswap
Uniswap is a very useful tool. It offers hundreds of tokens, allowing users to freely trade and swap tokens with one another. It also uses liquidity pools to automate and decnetralize this process.
Uniswap does have some drawbacks. Because it relies on users to provide liquidity, it needs to encourage users to put funds in their pools. This means that there are higher gas fees for transactions. Also, the site does not currently offer charts, so it can be difficult to make informed trades using only Uniswap.
Download MetaMask and Reap the Benefits
As mentioned earlier, MetaMask is a great way to efficiently connect to Uniswap. The MetaMask interface is extremely easy to use and understand, allowing users to learn about decentralized finance (DeFi). It also allows users to easily explore dApps through its connection to the Ethereum network.
MetaMask also supports airdrops. An airdrop is when a new cryptocurrency is placed in your wallet for free. MetaMask takes part in these airdrops, sending its users free crypto periodically for using certain decentralized applications. MetaMask is a great tool for beginners looking to learn more about DeFi as well as experienced users looking to use all of the technology crypto has to offer.
Frequently Asked Questions
How do I use Uniswap using coinbase?
You can use Uniswap through Coinbase wallets mobile application.
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About Caden Pok
Caden has been involved with crypto since 2018, when he began investing, trading, and mining tokens. He took part in undergraduate research studying cryptoeconomics at the University of Michigan, where he will graduate Phi Beta Kappa with a bachelor’s in economics in 2025. He is experienced with DeFi technology and multiple blockchains, currently investing in Ethereum and Bitcoin.