ZoneBitcoin EditorialYou've definitely heard of Uniswap, right? This stirred up the entire crypto planet in 2019 and 2020. In fact, it was one of the first times we really heard about the DeFi. It is indeed one of the phenomena where we saw how decentralized finance had real potential. It was also the spearhead of a string of similar projects like Sushiwap for example.
So, it’s certainly in vogue, and there’s definitely a reason behind it. Also, what we will see in this article is a pragmatic aspect. We will see, in fact, how to make money on Uniswap.
The origin of Uniswap…
In reality, behind the protocol, there was a first description made by the founder of Ethereum, Vitalik Buterin. But this dates back quite a few years and more details were needed. This is what the founder of Uniswap brought, Hayden Adams, November 2, 2018.
(Remember that in 2020, the protocol was updated and there, we are in fact using version 2)
In fact, Uniswap will exploit the oldest AMN (Automated Market Maker)) which Vitalik had in mind when designing Ethereum.
Indeed, Vitalik had already thought about a smart contract protocol in which liquidity reserves could be deployed. The goal being to support decentralized exchange platforms, once again. Vitalik had called it "Automated Market Maker". He had written, in fact, that the funds in the reserves will be provided by different parties.
For the liquidity provided, people will receive a share of the fees charged. This is also how we ensure that people will be interested in participating in the protocol and provide liquidity. Of course, the rewards are in proportion to the amount of their contributions.
Understand: The more liquidity you provide, the more reward you earn. Logic. It is with these gains that members of the community are solicited and inclined to participate. This gave rise to what we call the Yield Farming.
Why was Uniswap created?
In fact, Uniswap is an open source protocol that is decentralized (necessarily). Please note that the platform is designed to provide immediate and automated liquidity. This liquidity is valid for all ERC-20 tokens. All without the need for a traditional order book.
So the big difference between platforms like Uniswap and the centralized exchange platforms that we use to buy cryptocurrency, is that there, there is no'order book.
Order books are purchase/sale offers from people who want to buy or sell tokens. Order books are therefore usual on trading platforms, therefore. Yes, this is typically what we find in centralized exchange platforms like Binance for example.
What needs to be understood here is that for order books to be functional, there needs to be some liquidity. For people to be able to buy or sell, liquidity is essential, essential, indispensable. If there is no liquidity, then there cannot be sales or purchases of tokens. It's that simple.
It is therefore this crucial point which was at the origin of the creation of Uniswap. Resolve liquidity issues. It is therefore to solve the liquidity problems on decentralized markets which are based on the Ethereum blockchain that Uniswap was designed.
In technical terms, the Uniswap platform is an infrastructure that contains a decentralized pricing system so that the different parties provide liquidity. Traders can therefore trade ERC-20 tokens as much as they want. This is possible as long as there is a liquidity pool that allows it.
The great advantage of Uniswap is that it provides automated liquidity for an impressive number of applications on the blockchain. This therefore allows many decentralized applications (dApps) to be operational.
What can you do on Uniswap?
As we have just seen, Uniswap is two things at the same time: a decentralized platform in which we can exchange tokens with each other. Also, and above all, it is a protocol in itself.
It is this protocol that allows liquidity pools to be functional and meaningful.
Exchange tokens easily
As there is no order book on traditional platforms, there are no longer really buyers and sellers strictly speaking. Rather, there are liquidity providers who will be able to lend tokens to the protocol. This is how users of the platform will be able to exchange tokens directly with each other.
This is therefore a first use of Uniswap: allowing users to exchange tokens.
As you can see, it is still very different from centralized exchange platforms. There, it's minimalist and the interface is very simple.
Then, the other big difference is that to use Uniswap, you have to use your own Ethereum wallet. It's self-custody (you own your keys).
You need to connect your wallet to be able to start exchanging your tokens. This is called "swap". To do this, enter the amount of your crypto and the one you want to have in exchange. It is the protocol that takes care of the rates etc.
How to make money on Uniswap?
Anyone can deposit ETH tokens or ERC-20 tokens to provide liquidity. They provide capital on liquidity pools. After making a deposit, liquidity providers will receive tokens. These are paid in proportion to their share of the total pool. This is how they can see the share of fees that will be paid to them subsequently.
Liquid providers can exchange their tokens at any time and even withdraw their funds from the pools.
There is an internal algorithm in Uniswap so that the total liquidity of a pool always remains constant. This means that if one party makes a transaction that will reduce the ratio of one token, then the system will arrange for another token to regulate the reserve. This is how the price of tokens on exchanges are determined.
Make money with Uniswap
To make money on Uniswap, you understand, you have to become a liquidity provider. You'll see, it's very simple.
Here are the steps to follow to do this:
1/ Go to the site unitedwap
Click on “Use the app”.
There you will come across this page below:
Go to the tab on the right, at the top, and click on “Connect to a wallet”. This is where you move on to step 2.
2/ Now connect your Ethereum wallet
As you can see, we offer different Ethereum wallets, the most well-known in any case. Personally, I use Dappradar and so this is the one I'm going to choose to connect.
3/ Click on “Pool” and add your liquidity
As you can see, liquidity providers earn 0,3% of the fees on all trades. To add your liquidity, simply click on “Add Liquidity”. You can also choose to create a pair as well.
So, it is up to you to choose the type of peer to which you want to provide liquidity.
What are the pros and cons of making money with Uniswap?
Although it is simple to become a liquidity provider, we are entitled to wonder if there are risks. There is indeed an internal mathematical equation in Uniswap to regulate reserve pools. The highest orders are then more expensive than the smallest, as this will affect the pair ratio. It is this slippage which will increase with the size of the order. Basically, this can be a big disadvantage for traders and people who want to trade at the best price.
For users, therefore, there may be limitations to using Uniswap. That said, for liquidity providers, and given the popularity of these platforms (in terms of DeFi), it is a "simple" way to earn money.
That said, for risks, it is absolutely necessary to be aware of the phenomenon called the impertinent loss. The price of a token can depreciate, independent of the platform. A token can experience losses, that’s a fact. That said, a price can also depreciate but still generate profits.
This is why it is called an impertinent loss, because the profits can compensate for the losses. Over time, due to the internal equation of the Uniswap infrastructure itself, this will even out over time.
Finally, of course, as we have seen, there can also be hacks and hacks, Rug Pull on the least secure platforms…
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