5 Uniswap Facts You Must Know Right Now
The problem with crypto trading, and how many
steps and fees it can incur, is one many people have tried to tackle. Until
recently, the Binance blockchain was the most successful solution on the market,
since its use of pegged tokens allowed people to easily trade between select
cryptocurrencies over and over without incurring huge blockchain fees.
For Ethereum and its plethora of tokens, however, there’s a new best service: Uniswap.
1. What is it?
Uniswap is a new, Ether-based, distributed currency exchange. Unlike centralized exchanges, that take customers’ buy and sell orders and offer prices based on them, Uniswap works without an order book, instead acting as a liquidity provider.
2. How does it work?
Uniswap’s liquidity provider system works by
allowing people who have tokens to “lend” them to the system to give it
liquidity. Each time a customer buys a token from uniswap, they pay a small fee
that is then distributed among all liquidity providers for that token – with
larger providers obtaining a larger share.
In other words, Uniswap works in more or less
the same way savings accounts in banks do. You can provide liquidity by handing
them your crypto, and in return you get a small amount of crypto, while your
actual crypto might be used for other things (in this case, to sell to
potential buyers.) Unlike with banks, Uniswap does have 100% liquidity, only
not necessarily in the same tokens people have used to provide liquidity.
Prices in Uniswap are automatically calculated
using a formula based on the current offer and demand. Sellers don’t get to
decide how much to sell for, and buyers don’t get to place orders according to
how much they want. They’re instead offered a price by the exchange.
3. How do I use it?
First things first: Uniswap is only compatible
with Ethereum-based tokens using ETH and ERC-20. This means most tokens based
in the Ethereum network will work, but exterior tokens can’t be traded unless
there’s an equivalent, pegged token using ERC-20. This means, first of all,
that Bitcoin can’t be traded on Uniswap.
As another important detail, Uniswap doesn’t
allow for fiat exchanges. You can’t purchase tokens using USD, and you can’t
sell tokens for USD. You can, however, use USD-tethered tokens in the Ethereum
network.
Now onto how to use Uniswap: It depends on
whether you plan to use it as a liquidity provider or as a buyer.
As a buyer
Buying from Uniswap is simple. Trades take
place through the Uniswap website, and are
done in much the same manner as other crypto exchanges: Search for your desired
trading pair, look at price, click buy, proceed to make the payment, and then
receive your crypto.
It’s exactly that simple, as long as uniswap
has enough liquidity at the moment. If the system doesn’t have enough
liquidity, then you need to wait until it does.
As a liquidity provider
Using the exchange as a liquidity provider is more complex.
The way Uniswap works, you don’t just provide
liquidity in a single currency, but in a trading pair. This means you have to
deposit an equal value of both currencies in the trading pair – for example if
you’re providing liquidity in ETH/USDT, you’d have to deposit an amount of ETH…
and an amount of USDT that is equal in value to that much ETH.
Once you make the deposit, the system will
calculate how much of the current liquidity pool your deposit equals to, and
keep it noted. It will also recalculate it each time anyone adds to or withdraws
from it, making that percentage go higher or lower. You’ll be, at any time,
allowed to withdraw that percentage from the pool.
4.
The one small (but potentially
large) drawback
Now here’s the thing – when you add to the pool, you do so in exchange for a small amount of money from fees. But there’s a drawback: the crypto you add to the pool will not appreciate in value as much as if you were HODLing it.
This is because currencies change in value
often and said value changes are never uniform. So if you were to deposit, say,
1ETH and 100USDT (assuming an exchange rate of 1ETH=100USDT,) that value
wouldn’t really hold for long. Perhaps by when you want to withdraw the value
has tripled, and now 1ETH equals 300USDT.
This is a problem, because the system can’t give
you the exact same number of tokens you gave it. Instead, the system will
maintain the ETH/USDT pool, with both your deposit and that of others, balanced
so there’s always an equivalent value of ETH and USDT in it. This means it will
add and substract both ETH and USDT to it to keep the balance.
This means that, if ETH tripled in price, you
wouldn’t get to withdraw the 1ETH and 100USDT you put in (leading to a grand
total of $400) but an amount somewhere in between. In this case, you’d own less
than 1ETH, but more than 100USDT. The exact amount of each might vary depending
on how the pool is handled, but you’ll always make a profit in this case – only
a smaller one that if you had held onto your crypto.
The system works in both ways, however. If ETH
were to lose value, the grand total of ETH+USDT you’d get to withdraw would be
lower than what you put in, but larger than if you had held onto your crypto.
In other words, both the risk and the reward are distributed between you and
the exchange to ensure no value is lost.
5.
Is this worth it? Or is Uniswap
stealing from me?
It greatly depends. In both cases above (where ETH goes down and where ETH goes up) you’d also have received an extra amount of money from transaction fees over the time you were a liquidity provider. In some cases, this amount could be enough to offset the opportunity loss if ETH appreciated, and it will be a nice extra if it deprecates.
Uniswap isn’t there to necessarily make you
money, although it will pay you for providing liquidity. It isn’t a replacement
for crypto investments, but a different way to obtain a ROI while at the same
time providing a service.
To make it clear, Uniswap isn’t making money
at all – and thus it isn’t “taking” your earnings. Instead, while working with
fluctuating prices, the system does its best to maintain a balance between
trading pairs. The theoretical loss you incur isn’t Uniswap taking your money,
nor is it losing money. It’s just the result of a balancing act.
Conclusion
Uniswap is still a relatively new system, and
surely over time it will improve. It’s quite likely that we’ll get to see
larger exchanges using this method later on, perhaps even allowing for
inter-blockchain transactions. Over time, with extra improvements, the model
behind Uniswap is likely to replace many of our current-day exchanges. Whether
it is worth it for you to help it now or not, however, is entirely up to you.
Comments
Post a Comment