Uniswap Exchange

The Uniswap decentralized exchange (DEX) is the most popular DEX built on the Ethereum blockchain. For users wondering, "What is Uniswap?," this article provides an overview of what it is and how ...

How does Uniswap work?

Because Uniswap is an open-source protocol, many DEXs with the suffix "swap" have been released into the market. These protocols are essentially copies of the original Uniswap source code. Where they differ is in the graphical user interface (GUI) as well as in offer differentiation and positioning.

The most famous—and most controversial—of these copycats is Sushiswap. Upon copying Uniswap's source code, it proceeded to launch a vampire attack. A vampire attack is where a DeFi protocol offers various incentives to liquidity providers. A vampire attack aims to draw liquidity away from the target protocol.

How did Sushiswap achieve a successful vampire attack? The platform launched an aggressive marketing campaign. They also made it easy for Uniswap liquidity providers to switch over. Finally, they offered insanely lucrative rewards to make it worth their while.

Another less controversial example is Pancakeswap. This DEX lives on the Binance Smart Chain. Pancakeswap offers nonfungible tokens (NFTs) and provides yield farming opportunities, which Uniswap does not.

Uniswap, though, is the first DEX to rely on an automated market maker (AMM) model, rejecting the traditional open book model. The open book model is not as DEX-friendly due to, among other factors, liquidity issues. In contrast, the AMM model uses a liquidity pool with a constant product market maker model, and thus relies on the Constant Product Formula:

It's worth noting that in version 1 or v1 of Uniswap, liquidity pool providers were at risk of impermanent loss. In other words, it's best to view v1 as a minimum viable product that was released for beta (or even alpha) testing.

With each iteration, Uniswap presented considerable improvements for users. For instance, v2 introduced oracles and airdropped UNI tokens. UNI tokens are the official governance token of the Uniswap DEX. Uniswap users received these airdropped tokens if they used the platform before September 2020.

For v3, the most notable improvement came in the form of concentrated liquidity. This novel form of liquidity allowed liquidity providers to set the conditions for which they would receive their fees.

Moreover, v3 of Uniswap was released on the Optimistic Ethereum network. Optimism is a layer two scaling solution that is vastly superior to Ethereum's layer one. Its major benefits include reduced slippage and high gas fees as well as near-instant transaction speeds.

So how do you buy coins at Uniswap? Before diving into how to use Uniswap, it's important to answer the question: Is it safe to use Uniswap? Are smart contracts, blockchain technology and Decentralized Finance (DeFi) secure? These are the technologies Uniswap is built on.

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