Uniswap Explained: Making Sense of the Leading Decentralized Exchange
![Uniswap logo with a colorful background](https://assets-global.website-files.com/62dfb77ec1bdcba6bd3a413c/649492a0d87c8469ffa753b8_uniswap-hero.webp)
When you start your web3 journey, it doesn’t take long until you run into Uniswap. Maybe you want to yield farm, maybe you’re exchanging an airdrop for ETH. But as the biggest decentralized exchange, it’s hard to not at least hear of Uniswap.
But if you’re new to crypto (or just new to decentralized exchanges), it can be confusing—especially because Uniswap has grown in the past few years and added many new features. In this article, we’ll explain What Uniswap is, how it works and how you can use it safely and efficiently to get the most out of your web3 journey.
You’re probably here to figure out how to use Uniswap and what it can do for you. In this article, we’ll explore:
Uniswap is a decentralized exchange protocol built on Ethereum. That might sound complex, but behind the abstract language is a simple concept:
The Uniswap Protocol allows you to exchange one token for another without a middleman.
That’s why it’s called a decentralized exchange: Rather than holding huge amounts of each token themselves, Uniswap’s smart contracts facilitate transactions between users via liquidity pools (which we’ll explain below).
In contrast, a transaction on a centralized exchange like Coinbase means you’re always interacting with the exchange and never with the funds of other users.
Uniswap operates using an Automated Market Maker system. Users trade directly with the liquidity pool, and prices are determined by a formula considering the pool's balance of each token.
An Automated Market Maker (AMM) is a type of decentralized exchange protocol that relies on a mathematical formula to set the price of a token. Outside of crypto, a market maker holds massive amounts of assets and charges a fee to be the counterparty to trades placed on the exchange.
An automated market maker pools assets from the community and uses the aggregate to facilitate trades. An AMM also charges a fee, but pays most of it back to the community.
In an AMM, liquidity providers deposit pairs of tokens in a pool. Traders then trade against this pool. The AMM uses a formula to automatically determine the price of the tokens based on the supply and demand for those tokens in the pool.
AMMs like Uniswap’s are vital infrastructure of decentralized finance (DeFi) because they enable trading tokens without intermediaries.
Uniswap charges a small 0.3% fee on each trade, which goes directly to liquidity providers as compensation for their deposited funds.
While there are other parts of Uniswap, you’re most likely to come to Uniswap for one of two reasons:
Let’s dive into both:
Swapping tokens on Uniswap is simple:
There are two common errors you might encounter while swapping:
Not enough liquidity: If you’re trying to swap obscure tokens, you might see the “insufficient liquidity for this trade” error. This means Uniswap can’t perform the swap because not enough assets were deposited. This makes the swap impossible.
Price impact warning: When there are few deposits or a token is especially volatile, you might not receive an equal value of tokens in the swap. The “Swap” button will turn red and say “Swap anyway” and show you the loss you incur if you proceed with the swap.
As explained in our guide to yield farming, liquidity pools are at the heart of earning on Uniswap. The returns of these liquidity pools range from tiny (for large pools) to big (for lower-volume pools).
Here’s how to passively earn tokens on Uniswap:
But Uniswap isn’t the only DEX in web3. Let’s see how it compares to others in the space:
Because Uniswap is open source, anyone can build a rival exchange. That’s exactly what Sushiswap did: It’s a fork of Uniswap with added features.
While Uniswap remains the market leader, Sushiswap has established itself on multiple chains, including Avalanche, Binance Smart Chain, Optimism and others.
1inch is a DEX aggregator, not a DEX itself. It sources liquidity from various DEXs, including Uniswap, to provide users with the best possible trading rates. While interacting with 1inch, you might trade through Uniswap without knowing it.
Coinbase is a centralized exchange, offering a different user experience. It provides customer support, a user-friendly interface, fiat on/off-ramps, and custodial services but lacks the decentralization and permissionless nature of Uniswap.
Coinbase also doesn’t offer any way to yield farm by becoming a liquidity provider.
Curve, like Uniswap, is an AMM. However, it specializes in stablecoin and wrapped asset swaps, optimizing for minimal slippage in these markets, while Uniswap is more general-purpose. Curve, in general, is more experimental and exotic. Yields for providing tokens can be higher, but Curve is definitely for more adventurous DeFi enthusiasts.
Uniswap's protocol itself has been audited and is known to be one of the most secure and reliable DeFi dApps. But there are a few risks when using Uniswap:
Uniswap does a good job of warning you of trades with high slippage and deactivates trades with too little liquidity, but always make sure you’re making the right trade.
But the biggest risk with Uniswap isn’t Uniswap itself, it’s scammers who replicate or impersonate the DEX.
Bad actors sometimes imitate web3 dApps that look just like the real thing, but steal all of your assets. That’s why using Fire to simulate transactions is important.
Besides simulating transactions to show you what’s entering and leaving your wallet, we also verify domains. Look at the screenshot below. See the checkmark next to the app.uniswap.org? That means we’ve verified it as the authentic Uniswap—meaning it’s safe to interact with.
While we’ve explored how to use Uniswap swaps, pools and AMMs, Uniswap is more than that. If you’re curious about the rest of Uniswap, here’s the rest of it:
Uniswap is the most popular decentralized exchange and was one of the first AMMs. It has the most liquidity and offers some of the simplest UX in all of web3. That’s why it has remained popular throughout bull markets and bear markets.
We hope this article helped you take a step further on your web3 journey. As always, if you want a simpler and safer web3 experience, install our free Chrome extension today to understand every transaction you sign.