UniSwap 101: Trade and Provide Liquidity with Ease

The real world is not the only place where gas prices have become a sore point. Rising gas fees and transaction fees on popular crypto exchanges have been among the significant criticisms of trading in cryptocurrencies. 

However, the news is not all bad! There has been a slew of increasingly creative solutions to the problem of gas fees on crypto exchanges. Enter UniSwap, an Ethereum based solution whose goal is two-fold: helping users save on gas fees while also helping cryptocurrencies stay liquid.

What is UniSwap?

Uniswap was started in 2018 as a decentralised exchange (DeX) that allows users a lot of flexibility to ensure liquidity in their trades. 

Generally, cryptocurrency markets can be seen as either liquid or narrow. A narrow market implies a rigid structure of buy and sell orders that must match perfectly for transactions to execute. 

A liquid market, however, allows for a lot of agility in trading as there is no need for buy and sell orders to match up, owing to what is called a “liquidity pool”. This is maintained by users of the exchange who stake tokens to ensure the availability of funds for all transactions on it. In return, they are granted rewards in the form of a portion of transaction fees or governance rights on the exchange. 

Essentially, UniSwap is an extension of the Proof of Stake Model that most blockchains follow, allowing users to stake tokens in exchange for rewards. The key distinction here is in the rewards that users can get. 

Uniswap, being decentralised, allows users complete control over their funds and personal data, making it a non-custodial exchange. This means that the exchange does not own any personal information such as transaction data or personal logins. 

Automating Liquidity:

While UniSwap’s special place as a decentralised exchange may seem like a miracle, it is a simple concept in practice. 

By using Ethereum’s built-in compatibility with Smart Contracts and Web3 applications, UniSwap lets users stake tokens through their preferred wallets, allowing the platform to use these tokens as the required funds to execute a transaction. The platform performs matching of buy and sell orders based on an unalterable smart contract that allocates rewards based on the allocation that a user has placed in the liquidity pool. 

The tokens are tied to the smart contract, which acts as the commodity being traded for a particular transaction, thereby allowing for a lot of efficiency and speed. Users looking to exchange different tokens can use Uniswap while gaining valuable rewards based on their contributions to the liquidity pool.

The value of UniSwap is evident in the results and engagement the platform has generated since its inception. It is currently the 4th largest DeFi platform with nearly $3 billion in crypto assets on its portfolio. It has also given rise to several other platforms offering similar services, such as SushiSwap for example. 

A Simple Way to Trade:

While the concepts of liquid markets and automated market makers may seem daunting to the average user or trader, using UniSwap to engage in trading is a straightforward process! All it takes is a few simple steps.

  • The first step is to visit the UniSwap exchange’s website. 
  • Next, a compatible wallet can be connected to the exchange – visit the appropriate section and simply choose the wallet that holds the tokens meant for trading. 
  • Following this, the tokens that are to be traded must be moved to the liquidity pool on the Ethereum blockchain – a transaction ID is provided once the tokens are added.
  • Finally, simply wait for the transaction to complete and be confirmed – progress can be tracked using the transaction ID provided in the previous step. 

When the staked tokens are traded, users are rewarded for staking their tokens by the exchange. This makes it lucrative to use the platform, as well as efficient for trading, considering that there is little to no waiting time for matching buy and sell orders. This is the main selling point of UniSwap, in addition to a host of other benefits.

Why UniSwap?

One of the biggest advantages of using Uniswap is that it is a completely decentralised exchange. Moreover, considering that governance rights are an essential part of the rewards on offer, ownership of crucial aspects of the blockchain experience remains in the control of individual users of the exchange.

Another important selling point of UniSwap is that it promotes more efficient trading through the automatic creation of liquidity. Consider the crypto market as a collection of food stalls cooperating with each other. There is no way to facilitate trading in a narrow market unless the same items needed at one stall are on offer in another. This is a reflection of the buy and sell orders in other exchanges, which need to match precisely 

UniSwap’s automated liquidity ensures that all the stalls have what they need to continuously ensure trading efficiently and profitably. Indeed, the automated liquidity pool created by UniSwap has given it a significant advantage over other exchanges. This is simply because other exchanges need to create liquidity for every transaction taking place on them. UniSwap alternatively establishes the scope for a liquidity pool that all transactions can utilise.

What UniSwap Could Improve:

It is not all rainbows and butterflies for UniSwap despite its many benefits. Among its challenges, the influence of public discourse on the crypto industry is one of the largest. For UNI tokens to be of value, they must be traded with confidence by users on the exchange. However, public perceptions about crypto tokens and trading can affect any token’s day-to-day price, with UniSwap not being an exception.

Furthermore, issuing governance rights in the form of rewards could lead users with bigger stakes having more control over specific platform-wide decisions. This would allow those with high stakes in the liquidity pool to have unprecedented control over the funds and profits of others.

Finally, it is evident that UniSwap can be a very lucrative and engaging option for both newcomers and experienced traders in the crypto industry. Despite many similar platforms, it has managed to remain ahead of the competition and continue to generate value for existing and new users. So, how does our beginner’s guide sound? Interested to learn more such information?

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