Decentralized Exchanges (DEXs) represent a significant revolution in the buying and exchanging of cryptocurrencies. They have eliminated the missing link that previously hindered fully secure use of digital currencies – the intermediary, or third party in transactions. Now, trading occurs on a peer-to-peer basis, with funds remaining in private wallets until the final moment. Currently, Uniswap is the most popular and largest decentralized exchange.
As of the writing of this article, Uniswap has reached a transactional volume of over 1.2 billion USD. This figure doesn’t place the exchange high in the overall ranking of cryptocurrency exchanges. However, in the category of decentralized exchanges, Uniswap is often at the top.
Decentralized exchanges, including Uniswap, have not yet achieved widespread popularity. The primary reason is their relatively short presence in the market. During the previous bull market, DEXs were merely a future plan, while centralized exchanges dominated and continue to do so. This may also be due to a misconception that decentralized exchanges are too complicated and overwhelming to use. On the contrary, Uniswap is known for being the simplest exchange in the world.
Trading on Uniswap, unlike centralized exchanges, occurs without intermediaries. On a traditional exchange, the wallets assigned to our accounts are, in reality, the exchange’s wallets. At the exchange’s discretion, our funds can be blocked or stolen, as has happened in the past. Moreover, even if the exchange is not at fault, it can fall victim to a hacker attack, quickly draining the exchange wallets of deposited cryptocurrencies. In the case of Uniswap, this is practically impossible.
Token exchanges (swaps) occur entirely through the blockchain. User funds are deposited in their own wallets, with private keys inaccessible to third parties. The exchange takes place through a sequence of smart contracts that facilitate the exchange of one token for another. Upon user acceptance of a transaction, the funds of both parties are locked only for the duration of the transaction. Trading always occurs at market price.
In practice, token exchanges do not happen literally and directly between one user (wanting to sell X tokens of A for X tokens of B) and another (wanting to buy X tokens of A for X tokens of B). Matching two people who want to exchange cryptocurrencies in the same pair and at the same value at the same time would be problematic. However, this does not mean that there is a third party to the transaction. Some users, not interested in exchanging tokens, can provide liquidity to Uniswap. They contribute their pool of tokens to ensure smooth trading on the exchange on demand.
Contributing tokens occurs through a “liquidity pool.” A group of users puts their tokens into the pool to provide liquidity to others who want to swap tokens. Participants in these liquidity pools receive a reward for providing their resources, such as a 3% commission from transaction fees. This makes it an excellent alternative to staking. Transactions are also protected against manipulations and significant price fluctuations. Due to the fact that transaction time is directly proportional to the amount of commission (to the Ethereum network), there can be significant price variations in the meantime. Uniswap protects us from these variations. The transaction is automatically canceled if the price moves by more than 1% (default) either way. However, users have the option to change this percentage.
Access to trading on Uniswap is obtained by integrating our wallet, usually Metamask, with this decentralized cryptocurrency exchange. For this purpose, we must have a Metamask wallet and install a browser plugin that supports this wallet. We then connect the Metamask wallet with Uniswap through the plugin. This is essentially all that is required for account setup procedures. On Uniswap, you don’t have to, and even can’t, create an account. The only condition for trading is integrating the wallet with the exchange and having funds in it.
Then, as a new user of the DEX, we are confronted with an incredibly complicated exchange interface… a single small window. In the window, there are two dropdown lists from which we select the tokens we want to swap. After clicking the “swap” button, we must confirm the transaction – a notification will appear from our Metamask wallet, displaying the transaction summary – how many tokens we will receive and for how much. We also see the cost we will incur as commission. In additional settings, we can choose the option of a higher commission if we want the transaction to be finalized in a fraction of a second. After confirmation, the transaction will take place.
Eliminating the third-party from transactions brings other additional benefits, besides the security of the funds themselves. Uniswap (together with the Metamask wallet) provides security also for our personal data. In today’s environment, every significant exchange requires its users to go through a verification procedure. In the AML/KYC procedures aimed at preventing money laundering and terrorist financing, we share highly sensitive data with the exchange. Typically, this includes a photo of a passport, personal ID, or driver’s license. We also submit our photo (selfie) and sometimes even a proof of residence. All this information is then stored in the exchange’s databases. Like user funds, this data can potentially disappear or be used by the exchange in ways we might not wish for.
However, a significant drawback of Uniswap is the limited number of cryptocurrency pairs available. As Uniswap is an ERC-20 token exchange, it only supports the exchange of cryptocurrencies based on the Ethereum blockchain. Additionally, due to scalability issues with the Ethereum blockchain, transaction fees (excluding Uniswap’s own fees, which are low) can reach or exceed 100 dollars.
This comprehensive approach to trading on Uniswap highlights both its revolutionary features in the decentralized exchange space and its current limitations, particularly in terms of the variety of cryptocurrencies available and the costs associated with transactions on the Ethereum network. Despite these limitations, Uniswap’s user-friendly interface and secure trading environment make it a significant player in the realm of decentralized cryptocurrency exchanges.
