Uniswap is one of the best-known decentralized exchanges. The DeFi boom of 2020 has made Uniswap an extremely popular marketplace. This article is a Uniswap beginner’s guide. We will show you step-by-step how to make a trade and how to provide liquidity in Uniswap.
General information about Uniswap
Uniswap launched already in 2018. The founded of the protocol is an American software developer Hayden Adams. He has become a well-known figure in the crypto universe in 2020.
Uniswap was launched on the Ethereum MainNet in November 2018. This was long before the DeFi boom, so hardly anyone knew Uniswap even existed back then. Uniswap became one of the most popular DeFi protocols in the summer of 2020 when the DeFi market had a massive boom.
As mentioned earlier, Uniswap is a decentralized exchange (DEX). The big difference between DEXes and traditional cryptocurrency exchanges is that Uniswap is a Dapp (decentralized app). There are no user accounts, no KYC, no customer services, or any other services a centralized exchange (CEX) usually has.
A decentralized exchange is a fully automated Dapp, which runs on smart contracts. All transactions are done by using a Web 3 compatible wallet, like MetaMask. We’ll be using a MetaMask wallet in this guide as well.
Uniswap beginner’s guide – how to make a token swap
You can trade all Ethereum-based ERC20 tokens against each other. This means you cannot trade XRP, Litecoin, or Bitcoin Cash, for example. You can view all Ethereum tokens from this page.
Begin by clicking the Connect Wallet button on the Uniswap front page.
Next, you see a list of different wallets supported by Uniswap: MetaMask, WalletConnect, Coinbase Wallet, etc.
Choose MetaMask by clicking it.
The MetaMask wallet should welcome you back now and ask for a password if you weren’t logged in already.
Unlock your MetaMask by typing your password and clicking the orange Unlock button.
When MetaMask is connected to Uniswap, its ETH balance shows on the top row of the page. In this example, our wallet has 1.405 ETH in it. If you have any Uniswap’s UNI tokens in your wallet, they should show as well in the purple button.
We have 200 UNI tokens in our wallet, as you can see from the picture. On the right side of the ETH balance, you see the beginning and the end of your MetaMask wallet address.
Next, let’s perform a token trade. The form is quite simple as seen from the picture below. You’ll have to make two selections:
- From: select the token you want to sell
- To: select the token you want to buy
The first dropdown box has ETH selected by default. We’ll leave it like that since we want to trade ETH for other tokens.
Click the Select token button and a popup opens (see the image below).
You’ll see a list of all supported tokens and a balance of that token in your MetaMask wallet. This is the Uniswap default list of tokens. You can click Change from the bottom right corner to view other lists.
Search the token you want to buy and select it.
In this Uniswap beginner’s guide, we want to trade ETH to wNXM token. We are going to trade 0.30 ETH to about 2.8 wNXM tokens (see the image below). This trade shows in Uniswap with token values only, so you must calculate the fiat value yourself.
To avoid issues, we recommend leaving some ETH in your wallet before making a swap. For example, if you have 2.0 ETH in your wallet, maybe trade only 1.9 ETH of that. You must always have some ETH in your wallet to pay the fees for any ERC20 token transaction.
Additional information on the trade can be found below the Swap button. In this example, we are promised to get a minimum of 2.794 wNXM with a very low price impact (< 0.01%).
The Liquidity Provider (LP) fee is like the trading fee traditional exchanges charge from trades as well. The fee is usually much lower on Uniswap and other decentralized exchanges.
If you click the cogwheel icon in the top right corner of the page, the settings page opens. Here you can adjust some parameters of the token swap.
The most important adjustment is slippage tolerance. It literally means how much slippage you can tolerate. If you are making a big trade on a low-liquidity coin, this is something you must consider. The lower tolerance you have, the higher probability there is for trade not being executed.
The default value for slippage tolerance is 0.5%. If the token price would change against you 1%, the trade wouldn’t be executed. We recommend having the slippage tolerance on the same ballpark as the previously mentioned price impact suggests.
If you are a beginner and you make small trades (< $1000) on well-known tokens, there is nothing to be worried about.
Now we can click Swap and continue.
Uniswap asks you to confirm the swap as well. After that, your MetaMask wallet should pop up with gas fee information (see the image below).
As mentioned in this Uniswap beginner’s guide, all transactions (= gas fees) in the Ethereum network are paid in ETH, even if you’d swap some other tokens than ETH. Click the blue Confirm button from your MetaMask to execute the swap.
Your swap is now submitted (see the image below).
Depending on the network traffic and gas fees, you’ll have to wait usually about 20-60 seconds for the transaction to go through. You can click Close now and wait for the transaction to be confirmed.
Once the transaction is executed, your MetaMask wallet should update with new balances.
Remember, MetaMask shows only ETH tokens when you install it. Each new token must be added to MetaMask manually for it to become visible. See this guide for how to add a new token in MetaMask. You only need to add each token once.
Uniswap beginner’s guide – a liquidity provider explained
One of the key features of Uniswap is the liquidity pool. What does that mean?
In short, the liquidity pool is the reason why trades can be done at Uniswap. Since it is a decentralized exchange, there are no centralized order books available. Uniswap, and many other DEXes, are based on an AMM (Automated Market Maker) algorithm.
This algorithm will calculate the price of the tokens you trade based on supply/demand and market prices. But, someone has to provide liquidity first, because those tokens you swap must come from somewhere.
An investor providing liquidity to a DEX is called a liquidity provider, LP. These investors are rewarded with trading fees (= liquidity provider fees). Sometimes they might also get additional tokens, which in this case, are Uniswap’s UNI tokens.
In Uniswap, LP will always deposit two tokens 50/50. For example, if you provide liquidity to ETH/UNI pool you must provide an equal amount of ETH and UNI.
Uniswap LPs earn a 0.3% commission on each trade. In our previous example, we traded 0.3 ETH for wNXM. Hence, the LP fee was 0.3% of 0.3 ETH meaning 0.0009 ETH.
Providing liquidity on Uniswap
Next, we’ll show how to provide liquidity on Uniswap.
Click Pool from the main menu of the Uniswap app. If your MetaMask is not active and it’s not connected right now, choose Connect to a wallet. Now you can click Add liquidity (see the image below).
When you move your mouse over the question mark (see the image below), you’ll see some additional information. A simple form opens next with two input boxes. There are two input boxes because liquidity is provided 50/50 between two tokens.
ETH is selected on the first row by default. You can change that if you want, but we’ll keep ETH selected and pick an amount of 0.2 ETH.
Next, click Select token and choose another coin to pair ETH with. Uniswap is first recommending so-called common bases, meaning common pools. ETH, WETH, DAI, USDC and USDT (see the image below).
Below the common bases, there is a long list of tokens. It’d also show the quantities of each token you have in your MetaMask. Since we are providing liquidity, we need to have a balance of that token in our wallet.
In this example, we’ll choose UNI-token. When this guide is being written, 0.2 ETH equals about 16.7 UNI. You can see these in the image below.
Once you have selected tokens, click Supply.
Now you must confirm your supply. As you can see from the image below, the app will give us 1.0084 ETH/UNI pool tokens in return. Our share of the pool is 0.0003354%.
Click Confirm Supply and we move forward in this Uniswap beginner’s guide.
Your MetaMask wallet should activate now and show the gas fee. In our example transaction, it’s 0.016618 ETH, which translates to $5.85 at current prices (see time image below).
This transaction wouldn’t make sense normally, because the gas fee is so high compared to the liquidity being provided. The fees we got wouldn’t even cover the transaction costs. Ethereum fees have exploded after the DeFi boom, which keeps small investors mostly out of DeFi protocols.
Next, confirm the transaction from your MetaMask wallet.
The transaction should be confirmed almost instantly or in a couple of minutes, depending on the Ethereum network load. Note that both ETH and UNI tokens are being removed from our wallet now.
Note, that you can change the settings of the LP transaction the same way you can change settings for the token swap. Click the cogwheel icon in the LP form and adjust slippage tolerance and other options, such as the dark mode (see the image below).
You should also remember that there is a chance for impermanent loss when providing liquidity on Uniswap. If you are not familiar with impermanent loss, check this article first before becoming an LP.
If you want to minimize your risk for impermanent loss, use tokens, which have very similar values at all times. For example sETH/ETH and all stablecoin pairs (DAI, USDC, USDT, sUSD, etc.).
Impermanent loss is a feature of Uniswap. Other DEXes have a bit different system in place.
Uniswap liquidity mining
Uniswap launched its own UNI token in the autumn of 2020. You can “mine” or “farm” this token by through a process called liquidity mining. In practice, it means you can get some UNI tokens if you provide liquidity to certain Uniswap pools.
In our previous example, we provided liquidity to the ETH/UNI pool and received 1.0084 ETH/UNI tokens. These tokens are so-called LP tokens.
At the time of writing this Uniswap beginner’s guide (October 2020), Uniswap is giving out UNI tokens from ETH-DAI, ETH-USDC, ETH-USDT, and ETH-WBTC pools. Click UNI from the main menu and a page opens just like in the image below.
You can see the participating pools, the total deposited amount in USD, and the Pool rate, which tells you how many UNI tokens are handed out each week.
Note. The Uniswap liquidity mining program runs from the 18th of September to the 17th of November 2020. If you read this Uniswap beginner’s guide after 17th Nov 2020, this information may not be correct anymore.
Let’s pick a pool to go further. We click the Deposit button on the ETH-WBTC pool.
A page opens next, where you can stake the LP tokens you have from providing liquidity to the ETH-WBTC pool. Since we provided liquidity to the ETH-UNI pool in our example, we cannot do any staking or “farming” here. We do not have the right LP tokens.
Once you have the correct LP tokens, this is where you can stake them. When you withdraw your LP tokens, the system will automatically give you the UNI tokens you have earned.
Voting with the UNI token
Uniswap’s UNI token is a so-called governance token. Just like the title suggests, it is used for Uniswap governance. This is how pretty much all DeFi tokens work. By holding the token, you get to vote on proposals and have a say on the protocol development.
You can cast a vote yourself or delegate your votes to someone else. The minimum amount of UNI tokens required to make a proposal is 1% of the entire supply, which means there are not many entities in the world who can make new proposals. This is just a positive thing…
Click Vote from the main menu to access the following page.
Currently, there are no active proposals. Once there are any, this is where you can vote for them.
The Uniswap analytics page
The final item in the main menu is called Charts. This is where you can analyze statistics of the Uniswap protocol.
The largest pool is currently the WBTC-ETH (see the image below), which has over 500 million dollars of liquidity. The 24h volume for this pool alone is over 10 million dollars.
You can also order the list by volume. We provided liquidity in our earlier example to ETH-UNI pool. It is currently 6th by liquidity and 7th by volume. Click the name of the pool to view more statistics (see the image below).
The page shows 42 million USD of total liquidity for the UNI-ETH pool. It has collected over $46,500 in fees over the past 24h.
If you want to become a liquidity provider, you should check the Charts page first. You should probably select a pool with enough liquidity and big enough volume.
If you choose the biggest pool by liquidity (WBTC-ETH), your share of the profits is very small percentagewise. You shouldn’t choose anything from the other end of the spectrum either; the volume in HKMT-USD is just $158.90, which means you’d earn pretty much zero LP fees.
The UNI-ETH pool we used is quite good. It has lots of liquidity and volume, which will give some fees as well. Unfortunately, you’d have to provide liquidity worth thousands of dollars with current transaction costs. Otherwise you lose all profits to gas fees.
Uniswap beginner’s guide – most common issues
The most common issue you might run into is a transaction failure. This happens to everyone, who is an active user of Uniswap. The risk for failures grows when the Ethereum network is busy and/or token prices are moving quickly.
You shouldn’t be afraid, though. There is no risk of losing any funds, because failed transaction are reversed. It will cost you some gas, though, since a transaction was facilitated.
Uniswap transactions might fail if a token price changes over your slippage tolerance. We have also experienced several failures when using the standard gas fees. We recommend paying the highest fee, which has changed the success rate in our Uniswap transactions to 100%.
How can you change the gas fee, then? Let’s go back to the phase where we did the ETH -> wNXM token swap. The final phase is when your MetaMask wallet pops up and asks you to confirm the transaction (see the image below).
Click the Edit link on the gas fee row to access a page with more gas options. MetaMask shows you three different options for gas -> choose the most expensive one. Usually the difference to the standard fee is very small.
How do you know what gas fee is high enough? Go to a site like ethgasstation.info and check the current prices for gas fees for slow and fast transactions (see the image below).
In this example, the gas price for the fastest transaction is 77 Gwei. If you set the gas price for your transaction a little bit above this number, you shouldn’t have any problems.
Another issue, which Uniswap and all DEXes have, is fake tokens. This is because DEXes are permissionless by nature. It means anyone can provide liquidity to any token pairs. Criminals can create fake tokens or fake contract addresses. Be careful when you make a trade on any DEX!
If you are trading a hot token, its value might go up and down fast. This is where the previously mentioned slippage tolerance comes in. If your trades keep failing on hot token, you have to tolerate more slippage.
We recommend watching the following video by Boxmining, which has useful tips on using Uniswap.
It is also possible to cancel a transaction in your MetaMask wallet even after you’ve accepted and confirmed it.
Sometimes a transaction might be pending for a long time and you are in a hurry to make more trades. This is a problem, because transactions are processed one by one, so one pending transaction is blocking all other transactions in MetaMask too.
To learn more about reversing/cancelling a transaction, check this video by DeFi Dad.
Even if Uniswap is easy to use, there are still some challenges. Remember to try Uniswap, or any other DeFi protocol, with small transactions first. Don’t forget the whole DeFi industry is still very young. There are bugs and vulnerabilities found from protocols all the time.
Uniswap price and how to buy UNI token
Uniswap didn’t have its own token until it was launched in September 2020. UNI token was airdropped to people who had used the protocol earlier. This was an early X-Mas gift for many traders.
UNI token was also listed quickly to many traditional exchanges. This means that you can buy the UNI token without using the Uniswap DEX as well. The best place to go is Binance, which is the leading cryptocurrency exchange.
Now you should also know how to get UNI tokens from the Uniswap DEX. It’s easy and fast and there are dozens of different Ethereum-tokens you can swap to UNI any time you want.