Uniswap Exchange

• Uniswap is an Ethereum-based decentralized exchange (DEX) that allows anyone to swap ERC20 tokens.
• In September 2020, Uniswap launched its UNI governance token with an airdrop to anyone who had used the protocol before September 1.
• Uniswap V3 launched in May 2021, adding new features including concentrated liquidity and multiple fee tiers.

Uniswap Exchange is an example of one of the core products in the DeFi ecosystem, the decentralized crypto exchange, or DEX. DEXs aim to solve many of the problems of their centralized counterparts, including the risk of hacking, mismanagement, and arbitrary fees. However, decentralized exchanges have their own problems, mainly lack of liquidity—which means a lack of amount of money sloshing around an exchange that makes trading faster and more efficient.

Uniswap is trying to solve decentralized exchanges' liquidity problem, by allowing the exchange to swap tokens without relying on buyers and sellers creating that liquidity.

Below we explore how Uniswap works—and how it became one of the leading decentralized exchanges built on Ethereum.

What is Uniswap?

Uniswap is a protocol on Ethereum for swapping ERC20 tokens. Unlike most exchanges, which are designed to take fees, Uniswap is designed to function as a public good—a tool for the community to trade tokens without platform fees or middlemen. Also unlike most exchanges, which match buyers and sellers to determine prices and execute trades, Uniswap uses a simple math equation and pools of tokens and ETH to do the same job.

Did you know?
Uniswap was created by Hayden Adams, who was inspired to create the protocol by a post made by Ethereum founder Vitalik Buterin.

What’s so special about Uniswap?

Uniswap’s main distinction from other decentralized exchanges is the use of a pricing mechanism called the “Constant Product Market Maker Model.”

Any token can be added to Uniswap by funding it with an equivalent value of ETH and the ERC20 token being traded. For example, if you wanted to make an exchange for an altcoin called Durian Token, you would launch a new Uniswap smart contract for Durian Token and create a liquidity pool with–for example–$10 worth of Durian Token and $10 worth of ETH.

Where Uniswap differs is that instead of connecting buyers and sellers to determine the price of Durian Token, Uniswap uses a constant equation: x * y = k.

In the equation, x and y represent the quantity of ETH and ERC20 tokens available in a liquidity pool and k is a constant value. This equation uses the balance between the ETH and ERC20 tokens–and supply and demand–to determine the price of a particular token. Whenever someone buys Durian Token with ETH, the supply of Durian Token decreases while the supply of ETH increases–the price of Durian Token goes up.

As a result, the price of tokens on Uniswap can only change if trades occur. Essentially what Uniswap is doing is balancing out the value of tokens, and the swapping of them based on how much people want to buy and sell them.

What else is different about Uniswap?

Absolutely any ERC20 token can be listed on Uniswap–no permission required. Each token has its own smart contract and liquidity pool–if one doesn’t exist, it can be created easily.

Once a token has its own exchange smart contract and liquidity pool, anyone can trade the token or contribute to the liquidity pool while earning a liquidity provider fee of 0.3%. To contribute to a liquidity pool, you need an equal value of ETH and ERC20 tokens.

How are Uniswap tokens produced?

Whenever new ETH/ERC20 tokens are contributed to a Uniswap Finance liquidity pool, the contributor receives a “pool token”, which is also an ERC20 token.

Pool tokens are created whenever funds are deposited into the pool and as an ERC20 token, pool tokens can be freely exchanged, moved, and used in other dapps. When funds are reclaimed, the pool tokens are burned or destroyed. Each pool token represents a user’s share of the pool’s total assets and share of the pool’s 0.3% trading fee.

How to make your first trade on Uniswap?

Through Uniswap, you’re able to purchase ether (ETH) and any of the thousands of ERC20 tokens supported by the platform.

To do this, you’re going to need some ETH in your balance to pay for any transaction fees, as well as something to trade for the ERC20 token you want. This might be ETH, or another ERC20 token. For example, if you’re looking to trade USD Coin (USDC) for UNI, you’re going to need to hold USDC in your wallet plus some ether to cover the transaction fee.

Here, we’ll cover how to make your first trade on Uniswap —by purchasing some UNI tokens with ETH.

Step 1: First head over to the Uniswap exchange platform.

On the top right, click the ‘Connect to a wallet’ button, and log in with the wallet you wish to trade with. This can be either a MetaMask, WalletConnect, Coinbase Wallet, Fortmatic, or Portis Wallet.

For the purposes of this tutorial, we’ll log in with a MetaMask wallet.

Step 2: Once logged in, the trading interface will appear.

In the top field, select the token you wish to exchange for the token you want. We’ll select ETH. In the bottom field, search for the token you wish to purchase, or select it from the drop-down menu, in this case UNI.

Step 3: Now you’re ready to set up your order. You can either choose how much you want to spend by entering a number in the top field, or choose how much to buy by entering a number in the bottom one.

In our example, we’ll buy 0.1 ETH worth of UNI tokens.

Step 4: At the bottom of the order menu, you’ll then see how much you can expect to receive.

If you’re happy with these figures, click the ‘Swap’ button.

Your wallet click will then prompt you to confirm the trade, and potentially adjust the fees to a number that works best for you.

When you’re ready, confirm the transaction and it will then be processed. Once it’s done, your tokens will appear in your ERC20 wallet.

Next steps
Once you've completed your first trade on Uniswap, there are plenty of options for more advanced users.

Since Uniswap is an open protocol of smart contracts, a number of different front-end user interfaces have already been created for it. For example, InstaDApp allows you to add funds into Uniswap pools without needing to access the official Uniswap user interface.

Interfaces such as Zapper.fi allow users to add funds to Uniswap pools using just ETH instead of ETH and another token. The interface even offers simple one-click solutions for purchasing pool tokens in combination with bZx token strategies.