Uniswap is the most popular decentralized crypto exchange. But how does Uniswap work? We can say it’s a series of computer programs that run on the blockchain of Ethereum and allow for token swaps that are decentralized. It operates with the help of unicorns (as illustrated by their logo). Without having to trust someone with their money, traders can trade Ethereum tokens on Uniswap. Meanwhile, anybody can lend their crypto to liquidity pools called special reserves. They receive payments in return for supplying money to these pools.
It has been a challenge to create DEXes that compete meaningfully with their centralized counterparts due to the inherent limitations of blockchain technology. In terms of performance and user experience, most DEXes may enhance both. Many developers have thought about new ways of building a decentralized exchange. Uniswap is one of the pioneers of this. It could be a bit harder to comprehend the way Uniswap operates than a more conventional DEX. We’ll soon see, however, that this model offers some attractive advantages.
How does Uniswap work?
Uniswap, based on Ethereum, is a decentralized exchange protocol. It is an electronic liquidity protocol, to be more precise. To make trades, there is no order book or any centralized party required. Uniswap enables users, with a high level of decentralization and censorship-resistance, to trade without intermediaries. Uniswap is software that’s open source. On Uniswap GitHub, you can try it out yourself.
Uniswap leaves aside the traditional digital exchange architecture in that it does not have an order book. It works with the Constant Product Market Maker design, which is a variation of the Automated Market Maker model (AMM).
Smart contracts that hold liquidity reserves (or liquidity pools) that traders can sell against are automated market makers. The liquidity providers finance these reserves. Anyone who deposits the equal amount of two tokens in the pool may be a provider of liquidity. In exchange, traders pay the pool a fee which, according to their share of the pool, is then allocated to liquidity providers.
By depositing an equal value of two tokens, liquidity providers create a market. These can be either an ETH token and an ERC-20 or two ERC-20 tokens. Stable coins such as DAI, USDC, or USDT are usually made up of these pools, although this is not a necessity. In exchange, liquidity suppliers receive “liquidity tokens,” reflecting their share of the entire pool of liquidity. For the share they serve in the pool, these liquidity tokens may be redeemed.
Add liquidity to Uniswap
While Bancor was the first DeFi marketplace to allow liquidity pooling through automated manufacturers, Uniswap has since become more popular. Like other decentralized markets, Ethereum runs an open-source liquidity protocol.
Your money is owned by centralized systems and they charge you for keeping your money, but the Uniswap platform is the reverse. Uniswap is a decentralized exchange where your money is still fully under your power. It automatically takes the money out of your wallet after you initiate a transaction and places it back in another format. This is how it guarantees that censorship does not happen.
In a smart contract model, the Uniswap pool gathers tokens, and users trade against the liquidity pool. On Uniswap, you or anyone can swap tokens easily; to gain some fees, add tokens to a pool. On Uniswap, you can also mention a token. For a pair of ERC20 tokens, each Uniswap liquidity pool is a trading place. When a pool contract is generated, each token’s balance is 0; someone must seed it with an initial deposit of each token in order for the pool to begin initiating trades. This first supplier of liquidity is the one that sets the pool’s initial price. They are encouraged to bring the same value of both tokens into the pool.
Today’s uniswap rate is $20.90 with a $910,558,049 24-hour trading volume. In the last 24 hours, the price of UNI has risen 0.4 percent. It has a supply of 300 million UNI coins in circulation and a maximum supply of 1 trillion. Uniswap (v2) is the most competitive trading sector at present.
How it decides the price of each token is another significant aspect of this method. Uniswap uses an automated market maker scheme instead of an order book system where the price of and commodity is decided by the highest buyer and lowest seller. A long-standing mathematical equation is used in this alternative method of changing the price of a commodity based on its supply and demand. Depending on the ratio of how many coins there are in the respective tank, it operates by increasing and decreasing the price of a coin.
How are Uniswap tokens produced?
The contributor earns a “pool token”, which is also an ERC20 token, if new ETH/ERC20 tokens are applied to a Uniswap liquidity pool. Whenever resources are deposited into the pool, pool tokens are produced and pool tokens can be freely shared, transferred, and used in other dapps as an ERC20 token. You can freely exchange pool tokens, transfer them, and use them in other dapps. The pool tokens are burned or lost when funds are recovered. Each pool token represents a user’s share of the total assets of the pool and a share of the 0.3 percent trading fee of the pool.
How to add liquidity to Uniswap?
- All you need to do is log into the Uniswap (https://uniswap.exchange) website. When done, press “Join Pool” to navigate to the liquidity-adding interface.
- For pools, check. You may prefer TEND, KIMCHI, Dai or other pool.
- Then, just above the deposit area, you can click on “add liquidity” located on the left side. Uniswap will show you the balance found on the wallets you link to (Eth and other ERC-20 tokens). The exchange rate and the share of the pool of liquidity can also be seen.
- Uniswap will auto-fill the correct sum of the other assets, depending on the current exchange rate, after you enter the ETH or DAI value.
- To see more information, such as the number of liquidity tokens you will be minting, you can click on the transaction details. With the value of the tokens you want to mint, the specifics will also come.