Table of Contents:
- 1. Everything you need to know about Uniswap
- 2. Here is how Uniswap works at a High Level
- 3. What about liquidity pools at a High Level?
- 4. Also, remember about exchange rates and High Level
- 5. What are the pros of using this system?
- 5. The downsides of Uniswap
- 6. Summary and conclusion
The Ethereum blockchain is the source of many different projects and smart contracts that introduce a number of novelties and fresh solutions to the market of cryptocurrencies and this world in general. No wonder - it is one of the most attractive blockchains to host your idea. One of such ideas is Uniswap. It appeared not that long time ago and up to this moment, it received a lot of positive feedback to such extent, people started to look at this project as a great investment and trading area.
However, what do we exactly know about Uniswap? What made this particular project so entertaining to use? In this article, we will introduce you to the world of DEX, the Decentralised Ethereum Exchange and one of its most important factors, the Uniswap project itself. After that, we will provide examples that concern High Level features and give you both positive and negative sides of Uniswap itself and its use.
Everything you need to know about Uniswap
Uniswap is a decentralised exchange presented in the form of two smart contracts. They are located on the Ethereum blockchain and, at the same time, on the public, open source front-end client. It means that it is a market located fully on-chain and allows us to swap from Ethereum to ERC20 tokens and in other way around.
A very important thing to note is that besides swapping and trading, this piece allows you to contribute to liquidity pools of all ERC20 tokens you decide to swap. It means that you receive special commissions that are available in the form of exchange fees.
Uniswap is surely one of the most important projects that appeared in the crypto world in recent years because it excludes middle men and allows you to directly change ERC20 tokens and ETH tokens as much as you want. What is more, it improves the exchange's liquidity because of the contributions that everyone with Ethereum address does.
Here is how Uniswap works at a High Level
As mentioned earlier on, the entire idea of Uniswap is based on creating two smart contracts. They are known as a "Factory" contract and an "Exchange" contract. These two make sure that Uniswap is a public and open source project that does not earn by itself. Its beneficiary is the entire Ethereum ecosystem.
There is no need for any third party that needs to operate outside the Ethereum blockchain. Everything is located on it. Because of that, Uniswap is available for everyone who uses web3 as well as embed Uniswap functionalities by the applications.
What about liquidity pools at a High Level?
Thanks to the characteristics of Uniswap, it is possible to supply the liquidity of many different ERC20 tokens. It can be done by almost anyone who takes part in the process of swapping. Liquidity is also known as deposits. We can freely add or withdraw (remove) them from the ERC20 Exchange contracts. It all depends on our own needs.
However, before we do that, we need to know that it is necessary to implement the equivalent value of ETH and ERC20. To be more precise, we need to add 50% value of ETH and 50% value of ERC20 tokens. It is; however, a very simple thing to do thanks to the fully automated process of exchanging. As a result, we don't have to worry about anything because once we type the amount of ETH to deposit, the rest will be calculated on its own.
Also, remember about exchange rates and High Level
Just like in any other exchange, we all are interested with exchange rates. At a High Level, they are calculated with the use of an equation, which is: x * y = k. Important thing to note is that these rates are for an ERC20 token of any kind.
As far as these symbols are concerned, k is a constant value. x and y, on the other hand, represent the number of all ETH and ERC20 tokens that are available at this moment. It means that their numbers determine their exchange rate.
Though it seems as unfair practice, this particular equation allows us to keep the rates between the ERC20 tokens and ETH at the similar level at all times. As a result, we can notice a highly decentralized system that keeps the smallest margin of error in terms of cryptocurrency values as possible.
What are the pros of using this system?
The most important thing to consider is that Uniswap is one of the first, if not the first, system that is completely based on blockchain. As a result, it does not need third parties to introduce additional fees. What is more, without a mediator, we do not risk exchanging digital currencies at a bad rate.
Moreover, we finally receive the opportunity to exchange any ERC20 token without any worries. Let's also remember that there will be no whales influencing the market due to the market rate equation and restrictions that the system imposes. The only beneficiary of Uniswap is the blockchain itself - there are no users who profit from it. Interestingly, it is also much cheaper to trade even if we include other decentralised exchanges.
Let’s not forget about the liquidity pools. Everyone who is willing to do that can contribute. The commissions are at the level of 0.3% and they are split between all liquidity providers. We can also initiate custom pools and introduce some flexibility.
To sum up, here are the advantages of the system:
- Fully based on blockchain;
- No third parties that introduce fees for exchanging;
- The option to exchange all ERC20 tokens;
- No whales;
- No profits for third parties;
- Everyone can contribute to liquidity pools;
- We can create custom pools.
The downsides of Uniswap
Sadly, there are several negative things as far as the use of Uniswap is concerned. First of all, arbitrage trading is vital for the appropriate condition of the project. We need other sources and other forms of exchange in order for the Uniswap to provide us with balanced rates. What is more, we need to spend gas prices for swaps. It is even increased in the case of swaps that regard only ERC20 tokens.
However, thanks to the fact that Ethereum stills scales, the problem of gas prices will almost be non-existent. Uniswap is, unfortunately, still under development. As a result, there are still some crucial, formal documents missing. It means that even if the idea does not have any beneficiaries other than Ethereum, the reality might be different.
To sum up, here is the list of all advantages of Uniswap:
- Requires arbitrage trading and other exchange sources to be balanced;
- Highly dependent on gas prices;
- Under development - some official and vital documents are still absent.
Summary and conclusion
In order to present Uniswap in as objective a review as possible, it is necessary to wait for the protocol to evolve and to receive all the necessary documents that formalize this concept. There are still several disadvantages that we need to take into account.
In spite of that, an abundance of positive things that we can say about Uniswap proves that the implementation of such a project into Ethereum blockchain was a good decision and soon it can bring a lot of benefits to the blockchain itself as well as many other users.