What Is Uniswap and How Does It Work?

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Decentralized exchanges solve several issues caused by centralized exchanges. This includes mismanagement, arbitrary fees, and the risk of hacking.

While this is true, decentralized exchanges have unique problems, with the biggest being the absence of liquidity – which means there is no money in the exchange, which makes trading more efficient and faster.

This is where Uniswap comes in. This program aims to solve the liquidity issues seen in decentralized exchanges by letting the exchange swap tokens without requiring that sellers or buyers create the needed liquidity.

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Keep reading to learn more about Uniswap, how it works, and why it is considered one of the top decentralized exchanges on Ethereum today.

Uniswap Defined

Uniswap is a protocol on Ethereum where users can swap ERC20 tokens. Unlike other exchanges, which take fees, Uniswap is set up for the public good – it is a tool for the community to trade their tokens without any middlemen or platform fees.

Additionally, unlike other exchanges, which match sellers and buyers to execute trades and determine prices, Uniswap is different. This platform uses a set math equation and pools of ETH and tokens to do the same thing. This link provides more information on how it works.

What Makes Uniswap Special?

The main distinction of Uniswap when compared to other decentralized exchanges is that it uses a pricing mechanism that is called the “Constant Product Market Maker Model.”

You can add any token to Uniswap when you fund it using an equivalent value of the ERC20 and ETH token that is being traded.

For example, if your goal was to change a Durian Token (this is an altcoin), you could launch a new smart contract with Uniswap for the Durian Token. You would then create a liquidity pool with (as an example) $10 work of the Durian Token and $10 of ETH.

The difference with Uniswap is that rather than connecting sellers and buyers to figure out the Durian Token price, Uniswap uses a constant equation, which is x*y=k. Here, X and Y represent the value of your ETH and ERC20 tokens present in the liquidity pool, while the K is a constant value.

How to Swap Your Tokens with Uniswap

You can utilize Uniswap through the front end, which is found at uniswap.exchange. You must have an Ethereum address, as well, to access the features of the platform.

Once set up, you can add tokens to the Uniswap liquidity pool or swap tokens. All you have to do is:

  • Select the “swap from” token
  • Select the “swap to” token

Once everything is selected, you are given the option to approve the trade or transaction in your wallet and confirm the swap.

Try Uniswap for Yourself

As you can see, using Uniswap is an easy process and one that helps you achieve new trading capabilities. To learn more about what this has to offer, try it out for yourself.

If you are looking for more helpful information and resources on an array of topics, make sure you take a look at some of our other blogs.