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What Is Uniswap and How Does It Work?


As the decentralized finance (DeFi) ecosystem develops, non-custodial financial products will replace centralized intermediaries in financial applications such as loans, insurance, and derivatives. Unswap is a DEX or decentralized crypto exchange that is a key part of the DeFi ecosystem.

Decentralized exchanges address issues like hacking, poor management, and arbitrary charges that plague their centralized counterparts. However, despite their many advantages, decentralized exchanges are not without issues, chief among them being a lack of liquidity or the lack of money flowing through them to facilitate more efficient and quicker trading.

The odds are that you’ve bought or sold Bitcoin, Ethereum, and other assets on an exchange, even if you’re just starting out with cryptocurrencies. The most popular exchanges are Binance and Coinbase. Unswap attempts to address the liquidity issue faced by decentralized exchanges by allowing tokens to be swapped independently of liquidity creation by buyers and sellers. Below, we’ll take a look at Uniswap’s operations and how it has become one of the most popular Ethereum-based decentralized exchanges.

What is Uniswap?

The Unswap decentralized trading mechanism runs on Ethereum, or, more precisely, it’s an automated liquidity mechanism. It is not dependent on an order book or a centralized entity to make transactions. Uniswap is a highly decentralized and censorship-resistant platform that allows users to exchange money directly with each other.

However, how can transactions be made without an order book? A liquidity pool is built by liquidity suppliers following the Uniswap approach. Due to a decentralized pricing mechanism, this approach reduces the order book’s depth. We’ll go into more detail about how it works. Just be aware that users may switch between ERC-20 tokens without using an order book for the time being.

Uniswap does not require a listing procedure because its decentralized nature prevents it from being centralized. For the most part, any ERC-20 token may be released as long as a liquidity pool is accessible to traders. Thus, Uniswap doesn’t charge any listing fees. Hayden Adams developed the Uniswap protocol in 2018. However, Vitalik Buterin, a co-founder of Ethereum, was the one to disclose the underlying technology that motivated its implementation initially.

How does Uniswap work?

Uniswap differs from conventional digital exchanges in that it does not have an order book. Instead, it operates using a CPMM model based on the AMM model.

Traders can trade against automated market makers’ liquidity reserves (or liquidity pools). Funding for these reserves comes from liquidity providers. The pool qualifies as a liquidity provider when two tokens are deposited. Traders pay a pool charge, which is then divided among liquidity providers based on their pool shares. Now let’s take a closer look at this.

Liquidity providers deposit an amount equal to the value of two tokens to build a market. These pools often use stablecoins like DAI, USDC, or USDT, but they are not required to do so. Each “liquidity token” represents a portion of the total liquidity pool and is received as payment from liquidity providers. Exchanges can be made for the portion of the pool that these liquidity tokens represent.

Let’s examine the liquidity pool that exists for ETH/USDT. This pool consists of two halves: ETH and USDT lets call them x and y. As a result, Uni Swap combines these two to calculate the overall liquidity of the pool. For now, let’s call it “k.” Uniswap is based on the principle that k cannot fluctuate or that the pool’s total liquidity must remain constant. As a result, the pool’s overall liquidity equation is as follows: x * y = k.

What happens then when a person wishes to make a trade?

Let’s say Rachel buys one ETH with 300 USDT from the USDT/ETH liquidity pool. Consequently, she increases USDT and lowers the ETH pool. Due to this, ETH’s price rises. The reason? The transaction reduces the amount of ETH in the pool, but the overall liquidity (k) remains the same. These factors determine the price. Ultimately, ETH costs depend on how much a particular deal changes the x/y ratio.

It is important to note that this model has no linear scaling. Instead, the bigger the order, the more x and y are shifted. As a result, slippage increases as bigger purchases become exceedingly more expensive than smaller ones. It also implies that a liquidity pool’s size facilitates the processing of large orders. Why is that so? The difference between x and y will be smaller in such a situation.

Uniswap LP tokens as NFTs

A liquidity provider’s position on Uniswap V3 is represented by a non-fungible NFT (ERC-721 token) instead of a fungible ERC-20 token like on Uniswap V1 and V2. 

An NFT representing your position in a specific pool will be minted based on the pool parameters you select on the liquidity-providing interface. The position can be modified or redeemed by the owner. Including this NFT is a piece of original on-chain generative art. In Uniswap v3, SVGs are entirely generated on-chain and are determined by the underlying location.

This new approach includes the need for liquidity providers to adjust their pricing ranges in pairs of risky asset classes to maximize profits. However, the gas costs involved in altering ranges might make providing liquidity economically unviable for providers with little capital. When they make their Layer 2 solutions for Arbitrum and Optimism available, Uniswap intends to solve this problem.

The Uniswap v3 platform requires a more active presence to provide liquidity than its predecessor. However, a recent study indicates that active liquidity providers outperform passive liquidity providers. As a result, liquidity providers are now searching for passive solutions using services that handle active management. Among these solutions, Visor Finance is developing one; read about their performance on Twitter.

Uniswap on layer 2

Transaction costs for Ethereum have increased dramatically over the past year. Because of this, Uniswap is economically unprofitable for many of the smaller customers.

A second scaling method, called an optimistic rollup, will be implemented in conjunction with Uniswap v3. This is a clever way to scale smart contracts without compromising Ethereum network security. This implementation should result in a significant increase in transaction throughput while reducing user costs.

How does Uniswap make money?

The answer is that it doesn’t make any money. Paradigm supports Uniswap (a crypto hedge fund) as a decentralized protocol. The protocol creators do not receive a percentage of fees for transactions performed using the protocol.

Liquidity providers currently receive a transaction fee of 0.3% per trade. It is always free for liquidity providers to redeem them, but they are automatically included in the liquidity pool. Every liquidity provider holds a certain number of pool shares, which determines the fees to be charged. A percentage of payments could be earmarked for the development of Uniswap in the future. An updated version of the protocol, Uniswap v2, has already been released by the Uniswap team.

How to use Uniswap

Since Uniswap is an open-source protocol, anybody may develop their own front-end software for it. However, or are the ones that are most often utilized.

  • Visit the Uniswap user interface.
  • Plug in your wallet. You may use MetaMask, Trust Wallet, or any other Ethereum wallet that is supported.
  • Choose the token you want to trade with.
  • Choose the token you want to convert to.
  • Select Swap.
  • The pop-up window provides a preview of the transaction.
  • Verify the requested transaction in your wallet.
  • Watch for the Ethereum blockchain to confirm the transaction. Its status may be checked at

The Uniswap (UNI) token

In the Uniswap system, the UNI coin confers governance rights to its owners. In this case, only UNI owners have the right to vote on protocol updates. Previously, we discussed how the protocol provided a type of public benefit. The UNI token supports this notion.

The UNI token was created with one billion units at inception. Over the next four years, 40% will be available to the Uniswap team, investors, and advisers, and 60% to community members.

A portion of the communal distribution is contributed by liquidity mining. Accordingly, people who provide liquidity to these Uniswap pools will get UNI:



But who comprises the Uniswap community? This refers to Ethereum addresses that have transacted using Uniswap contracts. First, let’s look at how to get UNI tokens.

How to claim Uniswap (UNI) tokens

In the case of Uniswap, you will likely qualify for 400 UNI tokens per address that you used Uniswap. You can claim your tokens by following these steps:


  • Visit
  • Your previous Uniswap wallet should be connected. 
  • To claim your UNI tokens, click “Claim your tokens.”
  • Check the current gas prices on the Ethscan Gas Tracker before confirming the transaction in your wallet.
  • You have now earned your UNI! Congratulations!

Closing thoughts

A key benefit of Uniswap is that it allows users to keep ownership of their assets throughout the transaction process. Its goal is to keep automated trading accessible to investors while maintaining automated trading. All of this can be accessed via a really slick, user-friendly interface. The exchange can be accessed by users using a suitable wallet, such as Metamask. Once connected to Uniswap and the Ethereum network, the wallet can start trading.

One of the reasons Uniswap is so popular might be that older exchanges lack the level of functionality and liquidity Uniswap offers. As a result, the robust dApp is making significant contributions to the DeFi sphere.