The Basics of Uniswap: What is it and Why use a DEX?

(Last Updated on February 3, 2021)

Decentralized finance is the future of finance and a leaping, sparkling, rainbow horned, PINK UNICORN is the leader of the pack.

Uniswap is an ERC20 blockchain native decentralized and permission-less online cryptocurrency marketplace, or DEX, that utilizes smart contracts for instant token swaps, flash swaps, and pooled liquidity farming.

ERC20 = Ethereum Request for Comment 20 is the base layer protocol of the Ethereum blockchain originally created by Vitalik Buterin. The Ethereum project is what has spawned the birth of DeFi in cryptocurrency.

Uniswap is built on top of the ETH blockchain.

The Ethereum blockchain has amazing flexibility and allows much larger room for customization than Bitcoin’s original code. This along with the centralization of the ETH project has promoted itself as the utility token for developers.

Developers throughout the world are working on various revamps, customizations, and technical tweaks of Vilatik’s original code every minute of the day.

The majority of that digital innovation and coding power is aimed at “DeFi” or decentralized finance.

DEXs, or decentralized exchanges, are the conglomeration of thousands of crypto companies on an open source, open network, open community financial exchange. This is accomplished by operating in parallel with each other and creating companies within the massive infrastructure of ETH’s existing ERC20 blockchain.

This grants users instant access and full interoperability between ERC20 tokens for swaps, smart contracts, and instant settlements for users while greatly reducing onboarding friction and fees.

Trust in code, not people.

No delays, credit scores, excessive fees, or trust needed – enter parameters, agree to fees and setup smart contracts, then trust in the code.

A decentralized exchange (DEX) is a fully permission-less automated cryptocurrency platform that allows equal access and opportunity for all to invest, trade, and execute agreements through smart contracts. A new era of DEX platforms are coming and will cause a lot of disruption to the traditional financial systems of today.

The upcoming generations of today are already leaving the old, slow, corrupt bankers behind as they see the fallacies in needing to trust humans and legislators to protect their individual financial rights. They are diving head first into what they know – technology – and bringing their companies with them. And that comes with a high amount of trust for transparent computer code and digital confirmations that are proposed, executed, and validated on the blockchain.

DeFi offers complete financial sovereignty and freedom to any individual and/or company to interact with each other, independently of any 3rd party, through smart contracts that are trustless, transparent, highly efficient, and high speed.

Any individual or company can upload a token or setup smart contracts for potential investors to access through a DEX platform. Removing the requirements for traditional banking transfers, clearances, fees, and headaches.

Settlement speeds and contract executions bound in code – not people and inefficient bloated corporate structures that take days to withdrawal wealth out of while incurring fees along the way.

UNI is the native currency of Uniswap and all UNI holders have governance rights to vote on future proposals to the platform.

About 27.6% of Uni tokens in supply today

UNI tokens have continued to steadily increase in value despite the September 2020 airdrop that gave thousands of users 400 FREE UNI which most sold immediately.

At the time the airdrop was worth around $1,200 dollars.

Right now that airdrop is worth nearly $6,000 dollars and rising quickly!

Uniswap has established itself as the leader in DeFi DEXs.

-> Longest established history and highest user base trust

-> Reputation built on speed, uptime, and decentralized voting structure

-> Imagery of pink unicorns and newly minted millionaires

This is currently version 2 of the Uniswap protocol which expanded upon the original DEX version and added a lot more functionality.

Ver. 1 is a limited protocol only allowing liquidity pools of ETH and a ERC 20 paired token.

Ver. 2 allows liquidity pools of any ERC20 token pair, has flash swaps, and many technical improvements.

Version 2 has proven to be a very seamless, stable platform that has outperformed many crypto investors expectations.

I would say that Uniswap is, “the Apple of DEXs” – by far the cleanest and easiest interface for a beginner to navigate.

They are winning the battle to onboard new users and are already growing exponentially in 2021.

Uniswap Ver. 2 is the most trusted platform that has been built off upholding an excellent reputation for uptime, speed, and client support. The user interface is simple and straightforward which helps eliminate the extreme technical complexity of what is actually going on behind the Ethereum contracts to initiate and execute token swaps and liquidity pool actions over the ERC 20 blockchain.

The wealth of knowledge they host online for beginners to help educate and answer any questions a new user may have is what sets them apart from the pack. Many of the DEXs available today work well but only offer a skeleton interface and no support documentation, FAQ sections, or help for new users.

UNI is now clearly ahead of the competition with over $3.6 billion in locked value today and daily transaction volumes are operating at nearly $1 billion.

$3.61 Billion value locked in liquidity providing pools

Initially there was a surge of activity after the Uniswap 400 token airdrop in September but then pulled back to a more consistent daily volume under $350 million.

2021 has shown continued confidence behind the surging bull market of Bitcoin, Ethereum and many altcoins. The majority of the DeFi tokens have been appreciating massive gains since the ETH bullrun started. The DeFi investor market has responded in kind with stunning growth and daily volumes achieving new consistent highs with more participants entering 24/7.

Nearly $1 Billion in volume moving today

Uniswap provides the best in DeFi data analytics and charting

Uniswap V2 is leading the way with cutting edge analytics including real time charting for all tokens, token pairs, and liquidity pools.

All users have access to the pool analytics for each token and token pair which can really help define your investment strategy.

-> See which pool is the most profitable at various lengths of time

-> See which pool or token has the largest inflows or outflows of capital

-> Identify areas for arbitrage across tokens

Giving you free, high quality access to the information you need to make intelligent financial decisions. Some of the other yield farming or DeFi platforms offer very limited or no analytics and user friendly data at all.

Charts and analytics are a crucial piece of the analytics puzzle for success
AAVE token chart and top pairs

Focusing on the ease of use and friendliness to the traditional investor is going to knock down many barriers. All investors want to be able to accurately understand, monitor, and react to their financial data.

Onboarding new investors to the space will require simple and well designed software that makes sense to the average person, not just tech wizards.

This will be one of the major hurdles for every crypto project to clear over the next few years of growth.

What can you do on the DEX?

-> Instantly swap any ERC20 token for another ERC20 token incurring only on-chain GWEI fees

-> Farm liquidity by acting as a liquidity provider in a pool

-> Pools can consist of any pair of ERC20 tokens

-> Flash Swaps executing arbitrage utilizing loans instantly across hundreds of crypto tokens can offer new liquidity options and trading possibilities

Instant operability to a wide range of ETH based crypto projects and protocols. Advanced use of the protocols would be utilization of ‘smart contracts’ for setting up financial agreements such as loans, interest and yield farming, start-up companies, and all sorts of unique investment propositions.

29,499 token pairs is almost too many options.

Don’t just go throwing $100 doller bills at every token pair.. you might 100x or lose everything.

Any ERC20 based crypto company can add their own token -> pair it with ETH, UNI, or a stablecoin -> start looking for investors

You can even upload your own token if it is not currently on the platform. This allows new cryptocurrency projects to have an exchange ready to go for potential investors that are getting in early.

Granting free access and massive opportunity while not reducing any of the risks with investing. If the token is properly written and no major coding issues, it can be uploaded to a DEX and potential investors could stumble upon and invest at anytime. The token could be backed by nothing more than copy + paste and a founder that is hoping to scam some easy Ethereum into their wallet.

DYOR – Do your own research on ALL digital assets you invest into.

“Getting RUGGED” is a term created during these ICO and DeFi crazed, hyped, pump and dump times. You think you get in early, all the news and memes are blowing up on Crypto Twitter, then the founder pulls an exit scam, sells off massive share of tokens, crashing the price and you are left holding the bag of sh*^coins..

The infamous “Sushi Chef Nori” day 1 release rug pull – Sushi is up over $14 again as of today..

This is mainly due to most of the early ICO and a lot of the DeFi token companies being simple COPY + PASTE scammer blockchain frauds.

And you not doing any research at all except listening to that YouTuber or Twitter shill!

Due your due diligence and research every project thoroughly if you are long term investing – which generally is the proven method with altcoins IF you want to take the risk.

Access for all – no gatekeepers or hand holding here.

You are 100% responsible for your finances and trading choices. No middle man, no broker, no government regulations and legal framework stopping you from investing in a new startup or whatever you want.

Does that mean its safe?

Hell no!

Some new cryptocurrency projects will fail – some are scams, some lack technical abilities to succeed, some are losing to competitors, etc.

How easy is it to swap tokens on Uniswap?

By far the most simple DEX interface online.

Easy and lightning fast to swap tokens.

Swap any ERC20 based token instantly

The Uniswap token swap contract is by far the easiest out of any DeFi platform that I have tried. You get a very fast response time on estimated price impacts, fees, and current pricing.

Pay attention to your GWEI costs -> Gas fees are high for any transactions over Ethereum currently.

GAS fees or ETH on-chain fees are volatile and can be outrageously expensive right now this is due to the current DeFi craze and Ethereum pumping to new all-time high prices.

So right now it is best to be moving larger amounts through Uniswap as needed.

I would recommend limiting smaller transactions as you’ll be spending A LOT in Ethereum fees for every transaction. This makes it a bit more effective to add liquidity in larger amounts to pools or swap for larger amounts of tokens.

The average GWEI cost is running $9-$40 U.S dollars for ERC20 transactions ranging $20 to $2,000 dollars in Ethereum as of today.

Farm interest from fees in liquidity pools

By far one of the most interesting investment options in DeFi right now are liquidity pools or yield farms.

Basically pools of paired ERC20 tokens that can be used for loans, swaps, liquidity for various smart contract uses across the space. When users utilize the liquidity in the pool, all liquidity providers are rewarded with a share of the fees.

Add liquidity to pool -> Earn fees and interest based off your % ownership of total pool liquidity -> Deposit more or withdrawal at anytime

The share of the fees or interest is based on your provided token assets share of the pools total liquidity. This makes it a high risk, high reward, type of scenario where the larger liquidity providers will receive the highest percent returns on fees and interest.

Some testing on Uniswap V2 LPs

Which makes complete sense as you will want a high return if you are lending out the most capital.

This also promotes less “pool hopping” and dedicated liquidity providers due to high gas fees limiting transaction volumes and larger token pools being more cost efficient and producing higher returns with the larger capital you inject.

This is a good time to circle back and put in some time researching charts and pool analytics at info.uniswap.org

When looking into a LP Token pool I ask myself the following questions:

-> Is the pair too volatile for me to remain in longterm?

(UNI/ETH is a great long-term combo as they complement each other and should both increase in value)

(DAI/ETH isn’t as great a long-term prospect as DAI being a stable coin will stay stable while ETH continues to greatly increase in value)

-> What kind of volume is transacting on these tokens?

-> Is there plenty of volume exchanging through this pair to exit or enter as needed without being left a bagholder or getting stuck in a position permanently.

For these reasons I generally advise looking into higher volume LP pairings if you do decide to look into liquidity farming. It’ll give you a lower but more stable return so you can start tracking progress and seeing what kind of results you are getting.

What is impermanent loss?

This is only for liquidity providers in ERC20 paired pools.

High price volatility between a trading pair can result in the liquidity provider incurring impermanent losses and losing some assets temporarily or permanently.

Impermanent loss means the exchange ratio between the two ERC20 tokens inside your pool has grown so wide that your token balance has been changed to represent this ratio and coins have been lost.

-> If the token exchange price ratio comes back closer to your original position you may receive the tokens back

-> If the token exchange price ratio grows and never returns to your original position then your impermanent losses will remain and possibly grow

Smart Contracts have huge implications on future business agreements.

This opens up access for any individual or company to utilize a smart contract for a trustless, transparent, and efficient setup for any financial agreement

Transferring any amount of monetary value through code can be executed instantaneously, depending on specific requirements built into the smart contract such as calendar dates, services completed, software developments, products delivered, etc etc.

Transferring any amount of monetary worth through traditional financial brick and mortar = small amounts may take minutes to hours with larger amounts increasing that time up to days and even weeks. Plus, in this system you must trust that your business customer, client, or partner will execute their half of the proposal. You may have written contracts and legal frameworks, but ultimately there is no guarantee you’ll get your funds without additional legal hassle or financial cost if necessary.

DeFi is removing the inequality, barriers to entry, and friction in our financial systems today

Inequality in finance is a big issue and decentralized exchanges offer an excellent high tech solution.

The term “permission-less” has found a lot of adoption in the crypto space since 2020.

The world has seen a lot of the inequality and market barriers that limit access to financial tools for many individuals. This inequality has reared its ugly head during the COVID-19 pandemic where the Paycheck Protection Program issued millions to corporate fraudsters and big banks, while the local “mom & pop” shop with a few employees received pennies and were closed within a few months.

We have seen the bankers TURN OFF trading platforms such as Robinhood, E-Trade, and Charles Schwab when the GameStop ($GME) Reddit Rebellion short squeeze major hedge funds Melvin Capital and Citadel 72 for billions in losses.

It isn’t just friction against the average investor trying to protect his wealth or invest into emerging technology.

But the small business or startup that is trying to raise funds for an amazing product or service!

The U.S. traditional banking system has a lot of friction in it that makes access to capital difficult for individuals and small business.

Difficult account setups, credit checks, debt and leverage ratios, proof of employment, proof of income, proof of residency, many more difficulties for a new entrepreneur to grow a business. Some individuals are fortunate enough to have mentors or family that can ease this transition, but many Americans run into a ton of additional costs and time loss trying to access capital or loans for a new or currently operating business.

It can be even more difficult as a start up company – like it is for many aspiring tech companies.

If you are lucky and can reach the right venture capitalist or angel investor then you may score through the traditional route. We all know that is generally achieved easiest through having great connections – social media, business, alumni, family, friends, whatever it takes.

But most startup founders do not have that access to the networking needed to succeed through a traditional VC path.

Maybe you can grind conferences or social media until they take notice. Or maybe you have a product that stands out so well it only needs the platform to be seen. Maybe you can afford to go to the best universities and make lasting connections there.

Or maybe not.

DeFi is going to offer opportunities for all individuals and businesses like never before seen in the financial world.

Leave a Comment

Your email address will not be published. Required fields are marked *