What Is Uniswap and How Does It Work?

5 min readNov 26, 2020

Introduction

Centralized exchanges have been the backbone of the cryptocurrency market for years. They offer fast settlement times, high trading volume, and continually improving liquidity. However, there’s a parallel world being built in the form of trustless protocols. Decentralized exchanges (DEX) require no middlemen or custodians to facilitate trading.

Due to the inherent limitations of blockchain technology, it has been a challenge to build DEXes that meaningfully compete with their centralized counterparts. Most DEXes could improve both in terms of performance and user experience.

Many developers have been thinking about new ways to build a decentralized exchange. One of the pioneers of this is Uniswap. The way Uniswap works may be a bit more difficult to understand than a more traditional DEX. However, we’ll soon see that this model brings some attractive benefits.

As a result of this innovation, Uniswap has become one of the most successful projects that’s part of the Decentralized Finance (DeFi) movement.

Let’s see what Uniswap is, how it works, and how you can swap tokens on it simply with an Ethereum wallet.

What is Uniswap?

Uniswap is a decentralized exchange protocol built on Ethereum. To be more precise, it is an automated liquidity protocol. There is no order book or any centralized party required to make trades. Uniswap allows users to trade without intermediaries, with a high degree of decentralization and censorship-resistance.

Uniswap is open-source software. You can check it out yourself on the Uniswap GitHub.

Ok, but how do trades happen without an order book? Well, Uniswap works with a model that involves liquidity providers creating liquidity pools. This system provides a decentralized pricing mechanism that essentially smooths out order book depth. We’ll get into how it works in more detail. For now, just note that users can seamlessly swap between ERC-20 tokens without the need for an order book.

Since the Uniswap protocol is decentralized, there is no listing process. Essentially any ERC-20 token can be launched as long as there is a liquidity pool available for traders. As a result, Uniswap doesn’t charge any listing fees, either. In a sense, the Uniswap protocol acts as a kind of public good.

The Uniswap protocol was created by Hayden Adams in 2018. But the underlying technology that inspired its implementation was first described by Ethereum co-founder, Vitalik Buterin.

How to use Uniswap

Uniswap is an open-source protocol, meaning that anyone could create their own frontend application for it. However, the most commonly used one is https://app.uniswap.org or https://uniswap.exchange.

Go to the Uniswap interface.
Connect your wallet. You can use MetaMask, Trust Wallet, or any other supported Ethereum wallet.
Select the token you’d like to exchange from.
Select the token you’d like to exchange to.
Click on Swap.
Preview the transaction in the pop-up window.
Confirm the transaction request in your wallet.
Wait for the transaction to be confirmed on the Ethereum blockchain. You can monitor its status on https://etherscan.io/.

How to use Uniswap

· Install Metamask (Web 3 wallet). You can install it as a Google Chrome extension. All trades will happen through this decentralized wallet.