July 13, 2022

Uniswap- What is it and how should you invest in it?

Uniswap is a fully decentralized financial exchange (DEX) powered by the Ethereum blockchain that provides a platform for users to transact and exchange Ethereum-based tokens, also known as ERC-20 tokens.

Using Uniswap, users are able to gain direct access to financial services by eliminating the middlemen. It is currently the most popular decentralized cryptocurrency exchange.

For many years, centralized exchanges have served as the market's primary means of transaction and support structure. They have so far provided quick settlement times, a larger trading volume, and liquidity that is constantly increasing.

However, a new kind of financial exchange built on trustless protocols is now taking shape. With Decentralized Exchanges (DEX), users can trade without the involvement of any intermediary.

At the moment, Uniswap is the digital asset exchange (DEX) with the greatest market capitalization anywhere on the globe. In addition to this, it is now the Ethereum decentralized application market leader by market capitalization.

Uniswap is an extremely important player in the overall progression of cryptocurrency industry innovation and acceptance. To be more specific, the Uniswap protocol enables uses to trade ERC-20 tokens without gateways.

With tokens based on the ERC-20 standard being the most frequently used kind, they are compatible with all ERC-20 compliant wallets, exchanges, and decentralized applications, and they are hosted on the Ethereum network.

Because of the surge in popularity of decentralized finance (DeFi), the usage of these coins has witnessed a significant spike in recent times.

In this article, we discuss Uniswap and how to invest in it, exploring important touchpoints like:

  • Decentralized Financial Exchange
  • How it works
  • Features of Uniswap
  • How to Invest in Uniswap

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Decentralized Financial Exchange (DEX)

We cannot talk about Uniswap without first understanding Dex. DEX is a peer-to-peer marketplace where crypto traders are enabled to do transactions directly with one another.

DEXs provide one of the most fundamental uses for cryptocurrency, which is the facilitation of financial transactions that aren't mediated in any way by traditional financial institutions like banks or brokers.

The Ethereum blockchain is used by the majority of the most popular decentralized exchanges (DEXs), including Uniswap.

DEXs are also a part of the expanding suite of decentralized finance (DeFi) tools, which make a wide variety of financial services accessible directly from a compatible cryptocurrency wallet. 

Decentralized Financial Exchange
Decentralized Financial Exchange

DEXs, as opposed to centralized exchanges like Coinbase and Binance, do not permit the trading of fiat currency for cryptocurrencies; rather, they only deal in the exchange of one cryptocurrency token for another cryptocurrency token. 

This is because decentralized exchanges are governed by a collection of smart contracts. They utilize an algorithm to determine the pricing of the various cryptocurrencies when compared to one another, and they use "liquidity pools" to facilitate trades.

In these pools, investors lock their assets in exchange for incentives that are similar to interest. Transactions that take place on a decentralized exchange are settled immediately on the blockchain, as opposed to being recorded on the internal database of the centralized exchange.

Because DEXs are typically constructed using open-source technology, anyone who is interested can view the inner workings of the platform at any time. 

How Does Uniswap Work?

The "Exchange" contract and the "Factory" contract are the two types of smart contracts that power Uniswap. These are pre-written computer programs that are activated automatically by the occurrence of a predetermined set of events and are designed to carry out a particular set of tasks.

In this particular scenario, the exchange of tokens is facilitated by the exchange contract, while the "factory" smart contract is used to add new tokens to the platform. On the improved Uniswap v.2 platform, it is possible to trade any ERC20 token for another token of your choosing. 

Uniswap Features

Open Source

Uniswap is totally open source, which means that anyone is free to use it as a model for developing their own decentralized exchanges. Even more impressively, it does not charge users any fees to register tokens on the market.

The fact that traditional centralized exchanges are motivated by profit and require extremely high listing fees for new coins is already a significant deviation from decentralized markets.

Because Uniswap is a decentralized exchange (DEX), users are able to keep complete control over their finances. Unlike when using centralized exchanges, maintaining ownership of one's private keys mitigates the risk of having one's assets stolen in the event that an exchange is ever compromised. 

Automated Market Maker

An automated market maker is a form of decentralized exchange that provides users with the opportunity to trade numerous different token pairs. The prices on Uniswap are determined by mathematical algorithms, and transactions are carried out with the help of smart contracts.

The exchange must have liquidity pools for this to be functional. Each liquidity pool contains resources for a certain pair of cryptocurrencies. When consumers make trades, it pulls from a pool of available liquidity.

Users are able to receive rewards while simultaneously allowing peer-to-peer trading by contributing tokens to Uniswap's liquidity pools. Tokens can be supplied to liquidity pools by anybody, anywhere, and individuals can develop and list their own tokens using the ERC-20 standard.

Tokens can also be traded between individuals. On Uniswap, there are presently hundreds of different tokens that users may trade.

Constant Product Market Maker

Founded on the automated market maker system, the constant product market maker system ensures that the  price of a coin will go up or down depending on the proportion of that coin's total supply that is contained within each pool.

It's important to keep in mind that whoever adds a new ERC-20 token to Uniswap is required to deposit a specific quantity of the chosen ERC-20 token in addition to an equal quantity of another ERC-20 token in order to kickstart the liquidity pool.

This is something that must be done before the token can be traded on the platform. The formula for determining the cost of each token is as follows:

x * y = k, where x represents the quantity of token A and y represents the quantity of token B. K is a value that remains constant.

Arbitrage Trading

Arbitrage traders are the unofficial stabilizers of the Uniswap ecosystem. These traders focus their attention on discovering price differences across different exchanges and then capitalizing on those differences to make a profit.

On Uniswap, arbitrage traders look for tokens that are currently exchanging hands at a price that is either more than or lower than their average market price.

This is because huge transactions may cause imbalances in the pool, which in turn can either drive prices up or drive prices down. They continue doing this until the price of the token stabilizes and becomes comparable to the price on other exchanges, at which point there will be no more opportunity for profit.

The stable link that exists between the automated market maker system and arbitrage traders is what ensures that the price of Uniswap tokens remains in sync with the price of other tokens on the market.

The UNI Token

The Uniswap (UNI) token, being the native currency, is the principal asset that can be traded on the Uniswap DEX (decentralized exchange).

UNI is the Uniswap token
UNI token

UNI was introduced as a governance token, which means that if you hold UNI tokens, it grants you the ability to vote on the policies and changes that run on the network as well as have a say in how the protocol is governed.

How to Invest In Uniswap (UNI)

Now we go into UNI, the cryptocurrency. There are a few different approaches you may take in order to make an investment in Uniswap if you are interested in doing so. The first method is to purchase it on an exchange just like you would any other cryptocurrency.

Uniswap is listed on a number of the most prominent cryptocurrency exchanges, including Binance, Coinbase, and Gemini. You may also acquire it on the Uniswap market by trading for it. In order to acquire UNI, follow these steps carefully:

Choose an exchange and get a crypto wallet

You can acquire UNI by exchanging other cryptocurrencies for it. You will need to pick a cryptocurrency exchange if you have never ventured into cryptocurrencies before or if you wish to invest using fiat cash. 

Exchanges are online platforms that allow users to conduct transactions with one another. The fees charged by exchanges and the functionality offered by exchange platforms might vary.

Next, you have to get an ERC-20 compatible cryptocurrency wallet such as MetaMask, WalletConnect, the Coinbase wallet, Portis, or Fortmatic.

After you have obtained one of these wallets, you will be required to deposit Ether into it in order to trade on Uniswap and pay gas fees, which is the name given to the costs associated with Ethereum transactions. Gas fees might go up or down depending on how many people are utilizing the network at the same time.

When it comes to making a payment via the Ethereum blockchain, the majority of wallet services that are compatible with ERC-20 provide you the option to go slow, medium, or rapid.

The most inexpensive choice is to go with the slowest possible speed, whereas the most costly one is to go with the fastest possible speed deciding how fast miners on the Ethereum network will execute your transaction.

The “Claim Uniswap” Option

This option is only available to those who have used Uniswap before. You can claim up to 400 UNI on any address you have used Uniswap with. To do so, follow these steps:

  • Go to Uniswap.
  • Join Uniswap using the wallet that you've already used with it in the past.
  • Choose the link that says "Claim your UNI tokens."
  • Check the status of the transaction via your crypto wallet
  • That’s it, you have successfully obtained your UNI!

Buy UNI from your Wallet

You can trade any ERC20 compatible coin for UNI, including USDC, BTC, USDT, and ETH:

  • The first thing you should do is log in to the Uniswap exchange site.
  • Click the "Connect to a wallet" option in the upper right corner of the screen, and then log in using the credentials of the wallet you want to use for trading. It might be a MetaMask, WalletConnect, Coinbase Wallet, Fortmatic Wallet, or Portis Wallet. We recommend using a MetaMask wallet to log in. You can download it here and find instructions to set it up here.
  • The MetaMask trading interface will become visible after you have successfully registered.
  • Choose the token you want to trade for UNI in the top box, then pick the UNI as the token you want to purchase. You may search for UNI in the bottom area, or you can pick it from the drop-down option.
  • Now, configure your order. Enter the amount that you want to spend in the top area and the quantity you wish to purchase in the lower field.
  • Check the bottom of the order menu to get an estimate of the total amount that will be sent to you. 
  • Check that they are correct, then click the "Swap" button.

After that, you will be prompted by your wallet to confirm the transaction, and you will have the option to adjust the fees to a more convenient figure.

Confirm the transaction when you are ready, and it will then be processed, depositing your UNI tokens in your ERC20 wallet.

Conclusion on Uniswap

The innovation of trustless financial exchange that serves as the foundation for Uniswap holds intriguing prospects for the future of DeFi. Despite the emergence of various Decentralized Financial Exchanges, Uniswap still holds out as one of the biggest, hosting arguably the largest trading volume of all DEXs.

However, it is important to cautiously enter into this investment, as with all crypto investments subject to volatility, having thoroughly assessed the risks. You can learn more about Decentralized Finance by checking out our article on how to invest in DeFi.