How To Trade Cryptocurrencies On Uniswap
Decentralized Finance
models have become the rave of the moment, and the growth that Decentralized
Exchanges (DEXs) have attained in 2020, is way ahead of the situation a few
years back. Uniswap is one DEXs platform that has continued to garner strength this
year in the DeFi world.
With the introduction of
trustless and automated protocol, a liquidity market dominance of over 23% and
TLV of $2.6 billion at the time of writing, Uniswap continues to be the best
performing project in the DeFi movement. This post provides key information
about Uniswap and how to trade on the decentralized exchange platform.
What is Uniswap?
You probably know a lot
about Uniswap by now, but a brief review wouldn’t be too much information.
This DeFi project was introduced
in November 2018 by Hayden Adams, with the inspiration coming off of an
existing technology initially described by Vitali Buterin, ETH co-founder.
Uniswap is an entirely decentralized ETH-based protocol built on smart contracts rather than centralized order books, thereby allowing users to swap ERC20 token seamlessly. This platform offers automated liquidity facilitated by a simple but formalized algorithm.
Uniswap is censorship-resistant i.e. any user can set up a newmarket and receive rewards for that. This DEX boasts growing liquidity,
earnings for liquidity providers and decentralized holding and trading
operations.
How does Uniswap Work?
Before trading on Uniswap,
it’s important to understand how the platform works.
Uniswap works based on a market
maker algorithm known as CPMM (Constant Product Market Maker), a variant of the
AMM (Automated Market Maker) algorithm. In simple terms, CPMM are smart
contract algos that hold liquidity pools for trading operations. These pools or
reserves are explicitly funded by lenders or liquidity providers.
Anyone can provide
liquidity by depositing ETH, ERC20 token or a pair of ERC20 token, and as an
incentive, they receive fees or tokens according to their contribution to the
pool. With the Uniswap protocol, there are no middlemen, platform fees nor
individual price dictators.
How to trade on Uniswap
Trading on Uniswap is not
rocket science and it’s relatively easy to comprehend. However, the basics of
leveraging on wallets and ETH must be honed, only then, Uniswap becomes fairly
intuitive. Here are some steps on how to trade on Uniswap.
-
First
thing first, ensure that you have an ETH wallet that can interface with smart
contracts.
A wallet like MetaMask
functions smoothly with most decentralized finance apps via its Chrome
extension. There is also a MetaMask mobile wallet software that was rolled out
earlier in September 2020.
-
Visit
the Uniswap user interface.
-
Connect
your choice wallets such as MetaMask or any wallet that supports Ethereum and
smart contracts. To connect your wallet, visit the website, launch the App and you’ll
be directed to the Pool/Swap page. Select your preferred Uniswap version (V2 is
more preferred).
Why is the Uniswap V2
preferred?
The recent attention
received by Uniswap as been down to the introduction of V2 – a significant
upgrade that enables direct ERC20/ERC20 swaps. V2 also provides support for
ERC20 tokens like USDT and OmiseGo that were previously incompatible, coupled
with several technical improvements that make it a preferred choice.
-
Connect
your wallet.
-
You
could either fund your MetaMask web or mobile wallet via the Uniswap UI or InstaDApp or just get some
Ethereum-based tokens. Another option would be Zapper.fi although it restricts
wallet funding to just ETH rather than ETH and an addendum token.
-
Since
you’ll be trading, use the swap option.
-
Select
the input token (exchange from). Since Uniswap supports a significant number of
Ethereum-based tokens, you’ll find assets such as MKR, LEND, DAI, USDT, WBTC,
TUSD, BAT, USDC, and so many others.
-
Select
the output token (exchange to) and Uniswap will provide some details about the
exchange/swap rates.
-
Click
on swap and a preview of the transaction request will pop-up on your screen
-
Wait
for the ETH blockchain to confirm the transaction
or monitor its status via https://etherscan.io/
-
Upon
confirmation, the exchanged token/asset will now reflect in your MetaMask or
preferred ETH-based wallet.
Final Thoughts
Uniswap is an innovative
ETH-based exchange protocol that allows anyone with an ETH compatible wallet to
trade tokens in a decentralized manner. Although there are a few limitations at
this time, it holds an exciting future for decentralized and trustless trading
of tokens and assets. With the implementation of the new scalability solutions
– Ethereum 2.0, Uniswap could benefit immensely and also improve trading
protocols.
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