If you are new to crypto, then you are new UniSwap. You are on this website as a result of your trying to get information about Uniswap V2. In that regard, this article will cover everything you need to know about Uniswap.
In a simple and easy language, Uniswap is known as a decentralized exchange protocol built on Ethereum. You may even call it an automated liquidity protocol.
Trading on this protocol is very simple; you don’t need to keep a book order or any other centralized third-party program before trading on the platform.
What we mean is that trading on this decentralized protocol platform requires no third party. Rather, it uses a high degree of decentralization and censorship resistance.
As a matter of fact, Uniswap has been used as a topic frequently debated in the Defi space. Uniswap was created by Hayden Adams. Hayden took a practical approach to the equation and created Uniswap, a protocol for automated liquidity provisioning.
What is Special about Uniswap
Now that you know what Uniswap is about, then we need to move further a bit by covering what is special about Uniswap. Meanwhile, we will cover Uniswao V2 and V1 in this article.
Uniswap differs from other decentralized protocols because of the pricing mechanism called the Constant Product Market Maker Model.
With this pricing mechanism, any token can be added to Uniswap V1 and Uniswap V2 by finding it with an equivalent value of ETH and the ERC20 token being traded.
Pros and cons of Uniswap
Though, you know what Uniswap is about. Then, you need to know that it has positive and negative which you need to know as well.
In this part of the article, we will take a look at the pros and cons of using Uniswap V2 for both tradings and for staking coins as a liquidity provider.
Pros
====> Unisawp adds liquidity to the token (coins) in the participating markets.
====> It stays true to the decentralized values with which the cryptocurrency ecosystem was originally created, thus being a huge attraction for purists. It helps to distribute the power and control that centralized exchanges have.
====> Since there is no interaction with oracles for real-world data, the chances of hacks are decreased
====> It offers higher privacy protection when compared with centralized trading exchanges as it requires NO KYC
====> It is considered to be more secure than CEXs as you can trade from your own wallet and not the exchange’s wallet. Here you have self-custody of your cryptocurrency assets
====> It is another means of generating passive income by just adding funds to the liquidity pool
====> It is easy to use as it gives room for free token listing
Cons
====> Erratic gas fees depending on network congestion.
====> Once trading reaches a desirable level, the token creator may then dump all the coins (causing the price to crash) or steal any funds deposited into the protocol (known as a rug pull).
====> If your transaction was not successful, the transaction fee can’t be recovered
====> Be aware that because anyone can list a token on Uniswap V2, some tokens listed on the exchange exist purely to scam users. Such tokens often appear with little background development or information and promise great things.
====> Failed transactions due to low gas settings leading to expenses.
Understanding the Difference between Uniswap V1 and Uniswap V2
Uniswap V2 was built to fix some errors on V1. In that case, uniswapV2 is an upgraded version of uniswapV1.
Many features were included in version 2 which are not available in version 1. Some of the features are flash swaps, price oracles and swapping routers.
Out of these features, swapping routers is the most important to understand how to get a better sense of the way Uniswap routes tokens between liquidity pools.
Uniswap V2 Swaps
Once you are on Uniswap V2, you will be able to access end-users with 3 different options to swap your tokens using the Router Contract.
What is a Router Contract? This is known as a contract containing routing logic to send your tokens to the right swapping contract.
In simple language, the router contract is aware of every swapping contract that implements the Uniswap V2 protocol. While on version 2, you have access to 3 swapping possibilities as listed in the article.
====> A direct swapping normally takes place between two ERC20 pairs. For example, two stablecoins such as DAI/USDC may prove very useful for traders.
====> The original swap through ETH, where you pay fees twice
====> Custom path swaps, this is the third swapping possibility on V2 of Uniswap exchange. Through this possibility, you can build a more complex swapping path such as DAI/ETH, ETH/BAT, BAT/USDT, and USDT/USDC to convert your DAI to USDC.
How to Provide Liquidity on Uniswap
Once you are able to connect your wallet to the Uniswap V2 interface, you will be able to access the liquidity features of the protocol through the Pool section of the website.
In this section of the website, you can decide what you want to do. You can either add liquidity to an existing pool using the “Add Liquidity” feature.
If you wish, you can as well create a new liquidity pool for a particular token pair using the Create a pair feature on the website.
It is discovered and believed most users want to add liquidity to an existing pool, here are the steps to achieve that goal.
Step 1 ====> You need to connect your wallet to the Uniswap website
Step 2 ====> Now, locate the Pool tab and click on the Add Liquidity button
Step 3 ====> Then, you need to choose the token pair you would like to add liquidity to (for example, ETH and USDC).
Step 4 ====> Once the tokens pair are selected, enter the number of tokens you would like to add for one-half of the pair (for example, 2 ETH).
Step 5 ====> Entering an amount on either of the pair will auto-fill the other with an equivalent amount of the second token. This is because the value of the two deposits needs to match.
Step 6 ====> You will also be able to see your share in that particular liquidity pool before you can click on Add Liquidity to go ahead with the transaction.
Step 7 ====> Now, click on transaction details if you would like to see more information about the transaction, such as the proportional liquidity tokens that will be minted to this stake in the pool.
Step 8 ====> Finally, confirm the transaction through your wallet, where you can adjust the gas fees. Then wait for the smart contract to execute the transaction. Your new liquidity provider tokens will automatically be sent to your wallet.
As a reward for providing liquidity to the protocol, you will be rewarded 0.3% of all the trades with this pair in proportion to your allocated share in the pool. The rewards can be claimed by withdrawing liquidity and will keep accruing in real-time in the pool until that time.
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How to Withdraw Funds from a Liquidity Pool on Uniswap V2
In case you want to make a withdrawal from Uniswap, follow the steps in this part of the article to remove liquidity from Uniswap V2
Step 1 ====> You need to connect your wallet to the website
Step 2 ====> Now, locate and click on Pool on the platform
Step 3 ====> Select the token pair you wish to withdraw your liquidity stake from
Step 4 ====> Click on the Remove Liquidity button
Step 5 ====> Confirm this decision to remove liquidity
Step 6 ====> Then you would need to confirm the transaction on your wallet
Step 7 ====> After this, the protocol proceeds to remove your liquidity from the pool after a final confirmation