There are literally thousands of cryptocurrencies, and the majority of them are built on the same blockchain network – Ethereum. Tokens built on the Ethereum Network are known as ERC-20 tokens. Uniswap is a protocol designed to improve services on the Ethereum Network.
Since there are so many tokens, it can be tough or frustrating to move from one ERC-20 token to another. Perhaps you have one token and you want another, but they aren’t both listed on the same exchange. Even if they are both listed on the same exchange, it’s extremely unlikely that they’ll have a direct trading pair.
Uniswap is a decentralized protocol for automated liquidity provision on Ethereum. In simple terms, Uniswap stores big amounts of Ethereum-based tokens, which enables the protocol to offer useful services that weren’t previously available.
Please note that in this article when referring to ‘Uniswap’ this will be in reference to Uniswap V2. There is also Uniswap V1 which has less features but was a pioneer in the decentralized liquidity field. Uniswap V1 was essentially a proof-of-concept, which taught the Uniswap team a lot. Following the success of Uniswap V1 the team raised a seed round, assembled a kick-ass team and set out to further improve their product. Thus, in this article we are looking at the latest version, Uniswap V2.
How Uniswap works
Uniswap is composed of smart contracts that balance liquidity in order to provide their services. These smart contacts store Ethereum based assets that are deposited by liquidity providers, which could be anyone. All you have to do is go on the Uniswap website and add liquidity to the pool.
By adding liquidity to the pool, you are contributing to the longevity of the Uniswap protocol. You will receive a number of Uniswap’s liquidity tokens that represents the amount of value that you have deposited to the pool. As a reward for contributing to the pool, you’ll receive a percentage of all trading fees that use the pool based on the proportion of the pool that you own. If you own 80% of the pool, you get 80% of the trading fees.
Capabilities of Uniswap
Uniswap has a number of features that play key roles in the development of the decentralized ecosystem.
Using Uniswap there are no trading pair restrictions. You can swap from any ERC20 token to another. The protocol is designed to utilize the underlying liquidity to allow you to create your own trading pair and do the swap you want.
This is made possible by routing, which finds a path between the asset you have and the asset you want. It doesn’t matter if there isn’t a direct trading pair, the protocol will find a route to complete the swap that you want. Best of all, it’s all wrapped up in a sleek, easy to use user interface.
Decentralized systems need to pull pricing data from somewhere, and it doesn’t make sense for them to rely on centralized entities. However, they also need to make sure that they are pulling reliable secure data, otherwise people can manipulate the price data to gain unreasonable profits.
Uniswap provides decentralized and manipulation resistance on-chain price feeds. In short, this service is vital for decentralized services that rely on pricing data.
A flash swap is an innovative way for users to withdraw the tokens they want with no upfront cost. Sounds crazy, right? Here’s how it works.
You can withdraw any ERC20 token for zero cost and use it to do whatever you want with it. However, if you don’t pay back the withdrawal, the entire transaction path will be reversed. When you pay back you can pay for the entire withdrawal, a percentage or just return the entire sum you withdrew.
Flash swaps are incredibly useful because they remove upfront capital requirements and unnecessary constraints on order-of-operations for multi-step transactions that use Uniswap.
How to use Uniswap
Video by Young And Investing