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Uniswap is the most popular decentralized exchange (DEX) in the world. The project pioneered the automated market maker (AMM) model which enabled individuals to trade cryptocurrencies in a decentralized manner.
On Uniswap, users can perform token swaps and earn fees by providing liquidity.
If you are wondering how to use Uniswap, this guide has all the information you need.
Key Takeaways
- Uniswap pioneered the automated market maker model.
- Decentralized exchanges like Uniswap are powered by smart contracts and liquidity pools.
- Each liquidity pool on Uniswap is made up of reserves of two crypto tokens.
- Users can use Uniswap v2 or Uniswap v3 to provide liquidity and earn fees.
- Uniswap allows users to place limit orders with maximum expiry of one year.
How Does Uniswap Work?
Uniswap is a muti-chain DEX powered by smart contracts and liquidity pools.
DEXs like Uniswap do not depend on centralized operators for liquidity or to match buy and sell orders. Instead, Uniswap uses an AMM mechanism in which smart contracts match orders, and liquidity pools facilitate token swaps.
Each liquidity pool on Uniswap is made up of reserves of two crypto tokens. For example, USDT-ETH, USDC-ETH, and ETH-UNI.
When a user trades USDT (Tether) for ETH (Ethereum), Uniswap facilitates the swap using liquidity from the USDT-ETH pool.
Anyone can become a liquidity provider on Uniswap.
To become a liquidity provider, a user must deposit an equal dollar value of two tokens to a liquidity pool. Uniswap liquidity providers earn a 0.3% trading fee on all trades proportional to their share of the pool.
How to Use Uniswap for Token Swap?
You will need a crypto wallet to begin using Uniswap.
Whether you want to learn how to use Uniswap on MetaMask, Coinbase Wallet, or Trust Wallet, the steps required to conduct trades on all crypto wallets are the same.
Here is how you can swap tokens on Uniswap:
- Open the official Uniswap website.
- Connect your crypto wallet.
- Select the token you want to sell.
- Select the token you want to buy.
- Enter the amount of tokens you want to sell. You can click on the “Max” option to automatically input the maximum amount of tokens available.
- Uniswap will automatically present you with the amount of tokens you will receive.
- Select “Swap“.
- Check details such as price impact, max spillage, gas fees, etc. Then, select “Approve and swap“.
- You will receive a notification to approve the transaction on your crypto wallet application. Sign the message and confirm the swap on your wallet.
- Your swap request will be submitted to the blockchain. If the transaction is successful, you will see “Swap Success” and a green checkmark on the screen.
How to Provide Liquidity on Uniswap
There are two ways to provide liquidity on Uniswap. You can use Uniswap v2 or Uniswap v3 to provide liquidity and earn fees.
The main difference between Uniswap v2 and Uniswap v3 is that Uniswap v3 allows users to concentrate their liquidity position within a custom price range.
Concentrated liquidity on Uniswap v3 allows liquidity providers to deploy their capital more efficiently, giving them the opportunity to earn more trading fees with less capital compared to Uniswap v2.
Providing Liquidity on Uniswap v2
Here are the steps you need to follow to become a liquidity provider on Uniswap v2:
- Go to the Uniswap website and connect your crypto wallet.
- Tap on the “Pool” tab on the home page.
- Select “v2 pools“.
- To provide liquidity, you must select a token pair and deposit equal dollar amounts of each token. Select the two tokens you want to provide liquidity for. Example. USDC-ETH, ETH-DAI, ETH-OP.
- Uniswap will show your share of contribution to the liquidity pool that you selected. Select “Approve“.
- Select “Supply“.
- Review the liquidity position details, then select “Confirm Supply“.
- Confirm the transaction in your crypto wallet.
- You can check the status of your transaction on blockchain explorers like Etherscan.
- Once the transaction is completed, you can view and manage your liquidity positions on the Uniswap website.
Providing Liquidity on Uniswap v3
- Go to the Uniswap website and connect your crypto wallet.
- Tap on the “Pool” tab on the home page.
- Select “v3 pools“.
- Select “New position“.
- Select the token pairs you want to supply.
- Uniswap will automatically allot you a fee tier depending on the selected token pair. According to Uniswap, “very stable pairs” earn 0.01%, “stable pairs” earn 0.05%, “most pairs” earn 0.03% and “exotic pairs” earn 1%.
- Select the price range you want to concentrate your liquidity for. You will have to select the maximum and minimum price for each tokens. Your liquidity will be used to facilitate token swaps within the price range.
- Select the deposit amounts.
- Select “Approve“.
- Select “Preview“.
- Review your liquidity position and select “Add“.
- Confirm the transaction on your crypto wallet.
- Once the transaction is completed, you can view and manage your liquidity positions on the Uniswap v3 pool page.
How to Use Limit Order on Uniswap?
Limit orders refer to trade orders executed when the underlying asset trades above or below a pre-determined price.
Buy limit orders are executed when the underlying asset trades at a pre-determined limit price or lower. Sell limit orders are executed when the underlying asset trades at a pre-determined limit price or higher.
In this section, we show how to buy and sell on Uniswap using limit orders:
- Go to the Uniswap website and connect your crypto wallet.
- Under the “Trade” tab, select “Limit“.
- Select the token you want to sell and the token you want to buy in exchange, or vice versa.
- Set your desired exchange rate and set when limit order should expire – your options are 1 day, 1 week, 1 month and 1 year.
- Select “Submit“.
In the screenshot above, we have placed a sell limit order to swap ETH for USDC. We have set the limit price of ETH to $4000. Expiry is set for one year.
The limit order will only be executed if the price of ETH reaches $4,000 or higher. When conditions are met, the limit order will automatically sell 1 ETH for $4,000 USDC. The order will be cancelled, if conditions are not met within the expiry date.
Difference Between Uniswap v2 and Uniswap v3
Uniswap traders may not notice the difference between Uniswap v2 and Uniswap v3 as the two verision of Uniswap function exactly the same when performing token swaps.
Liquidity providers, on the other hand, will experience a more customizable experience when providing liquidity using Uniswap v3.
Here is a table to help you understand the difference between Uniswap v2 and Uniswap v3.
What are the Risks of Using Uniswap?
Trading and providing liquidity on Uniswap expose users to several risks, including impermanent losses, smart contract hacks, and legal prosecution (depending on your country of residence).
Let’s go through them one by one:
The Bottom Line
If you are new to cryptocurrencies, learning how to swap tokens and provide liquidity on Uniswap will help you understand how DEXs across various crypto networks function. Once you have mastered crypto trading and liquidity providing on Uniswap, you can perform these actions on any DEX in the world.
We hope this guide helped you understand what Uniswap is used for and how you can earn fees by depositing your idle crypto tokens on the platform. Remember, crypto markets are highly volatile and risky. Always conduct your own research before investing.
