Buy & Sell Uniswap | Buy & Sell Cryptocurrency | Uniswap Exchange
Uniswap is one of the most interesting projects to launch on Ethereum in recent times. It is a protocol for decentralized exchange of tokens, but very different from the traditional ones seen today. Inspired by one of Vitalik’s reddit posts a few years ago, creator Hayden Adams initially sought to gain some Solidity practice. Soon after, though, this training exercise evolved into receiving a grant from the Ethereum Foundation. Uniswap exchange is a set of smart contracts deployed to the Ethereum network, which means the entirety of this process takes place on-chain. There is no token, no centralization, and no fees going to any of the founders. The mechanics of Uniswap take some getting used to, but afterwards we’ll see that this protocol for trading tokens has some nifty advantages over traditional DEXes.
On a typical traditional exchange such as Coinbase, market makers are familiar with supplying liquidity at various price points. For example, let’s say a trader has $1,000 dollars and 10 ETH at their disposal. On the buy side, they might bid $80 for 5 ETH and $60 for 10 ETH. On the sell side, they may offer 4 ETH at $120 and 6 ETH at $140. They’ve chosen to make markets at various price points they would be happy to transact. Collectively, all of the traders’ orders comprise the limit order book. As markets move up or down, traders may or may not get filled depending on the prices they’ve specified. Typically, the ‘price’ of ETH is quoted as the mid-market between the highest bid and lowest ask.
The Big Idea
Alright, so this sounds a lot more complicated than a regular exchange with a normal limit order book. The premiums also make it prohibitively expensive for whales to transact large size. So what is so great about this style of exchange? In a nutshell, the pooled liquidity smooths out the depth of the order book. There are no more large holes or large bid/ask spreads. This is preferable for small traders who don’t want to have to deal with limit order books (the Uniswap UX is one of the slickest we’ve seen in all of crypto). No more having to make bids or offers or doing heavy calculations. Liquidity providers can also “set it and forget it.” There’s significantly less overhead in terms of management of orders and positions. It’s an incredibly passive way to provide liquidity and earn some fees.
Uniswap also breathes life back into app-to-app (or machine to machine) transactions. In a world with millions of microtransactions, it makes a lot more sense to dip into one giant liquidity pool than to have to be conscious of price specific liquidity needs. Lifting the best offer on a small order size isn’t dangerous anymore(imagine a DEX with an empty sell side order book). Another use case is for security tokens to utilize Uniswap exchange to pay out dividends.
For Liquidity Providers
Liquidity providers have an even more confusing task at hand. Let’s walk through the inception of the ETH/DAI market. The first thing to note for liquidity providers (and traders, too), is that the x / y ratio represents the price of the trading pair. In our case, x / y = 100,000 DAI / 1,000 ETH = 100. Let’s also assume the Coinbase price of ETH is $100. If x / y didn’t equal 100, there would be an arbitrage opportunity between Uniswap exchange and Coinbase.