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Trading cryptocurrencies mostly take place on centralized exchanges. The popular ones being Coinbase and Binance. These platforms are run and controlled by the company that operates the exchange. They must manage users’ funds under their control by using a traditional order book system to facilitate trading. 

Order book-based trading needs a buy order and a matching sell order to trade in both price and quantity successfully.  

For instance, before you can sell one bitcoin (BTC) for $57,000 on a centralized exchange, you’d need to wait for a buyer who is looking to buy an equal or higher amount of that Bitcoin at that price.

The main constraint with this type of system is liquidity, which, put in context, refers to the depth and number of orders there are on the order book at any given time. 

Uniswap is a decentralized exchange.  It is fully decentralized and completely different because it uses a relatively new type of trading model called an automated liquidity protocol. First built in 2018 on top of the Ethereum blockchain, Uniswap is compatible with all ERC-20 tokens and infrastructure such as wallet services like MetaMask and MyEtherWallet. 

Uniswap is also completely open-source, meaning that anyone can copy the code to create their decentralized exchange. Users can even list tokens on the exchange at no cost. Uniswap being a decentralized exchange (DEX), also allows users to gain control of their funds at all times as opposed to a centralized exchange that uses an internal database to store the private keys of users. The risk of losing assets if the exchange is hacked is eliminated in Uniswap. 

Uniswap,  Ethereum’s most popular market maker (AMM) exchange is a decentralized ERC-20 exchange, but it is not designed for tokens only; it also supports Ethereum. We can also see Uniswap as an exchange protocol that permits you to exchange ERC-20 tokens without fear. The smart contract is written in Vyper Smart Contract Language, and it allows for decentralization, security, censorship-resistance, and permissionless utility. 

Uniswap Liquidity pool gathers tokens in a smart contract model, and users trade against the liquidity pool. You or anybody else can swap tokens or provide liquidity by depositing tokens into a smart contract and receiving pool tokens in return. You can also list a token on Uniswap. 

Apart from ERC-20 to ERC-20 token exchanges, you can easily exchange Ethereum for any ERC-20 token in a decentralized manner, with no company interference and no KYC involved.

In Centralized exchanges, platforms act as intermediaries over your money, and they charge you commissions for facilitating transactions. The Uniswap platform is the opposite. You always have total control over your money. Once you initiate a transaction, the money leaves your wallet and is put back in another format. This is how it ensures that there is no censorship. 

Read also:

Yield farming allows you to make more money with your crypto assets. How does this work? Like in traditional banks, where you can Provide your surplus cash for a fee in interest, you can get paid for depositing your tokens with crypto.  Uniswap avails you the opportunity to become a liquidity provider. 

On signing up on the platform and creating a liquidity pool, you share 0.3% of the transaction fees on the pools. You also have access to the percentage of liquidity you provide on the commission. For example, if you provide 60% liquidity to the liquidity pool, you will earn 60% of the transaction fee.

You can track your earnings with the following steps:

We will go further to explain how the Uniswap Liquidity pool works. The liquidity pools are an aggregation of tokens in smart contracts. There are many ERC-20 tokens in this liquidity pool for you to exchange – swap, send, and Pool- with another person, With Ethereum being the conduit. So, you can create a new exchange pair in a new liquidity pool for any token of your choice. 

For example, you can be part of the ETH/DAI liquidity pool. You will need to make an equal value of Ethereum and DAI, which is the token that you want to participate with. Therefore when someone comes in and decides to trade ETH/DAI on Uniswap, your liquidity will be taped. 

If someone wants to trade Ethereum in exchange for DAI, your DAI liquidity might reduce while Ethereum liquidity goes up. If your DAI goes down by a dollar, your Ethereum will go up by a dollar also. This is the way that the Uniswap Liquidity Pool work. 

When you get on the exchange platform, You will see “clickable” buttons like Swap, Send, and Pool. When you click Pool, it means you want to

Uniswap is designed so that you can add or remove the liquidity pool on the platform. We will explain how you can carefully carry out these tasks. 

Creating a liquidity pool is similar to creating your exchange. This allows you to control your tokens. Here are steps on how to create a pool: 

To add liquidity to a Uniswap Liquidity pool, there are a few steps you’ll need to follow. Firstly, bear in mind that you’ll need to have an ERC-20 wallet.  

This guide is as explanatory as it can be. We hope it is of great help to understand how Liquidity pools in Uniswap work and perhaps in helping you decide if Uniswap Liquidity pools suit your investment style. You can try to invest with a little sum before opting to up your investment stake if you wish to. 

Liquidity pools are pools of tokens locked in a smart contract to aid liquidity. The main aim of liquidity pools is to allow traders to trade their digital assets and, at the same time, earn rewards on their asset holdings. 

On the 19th May 2020, Uniswap released its second version on the Ethereum Mainnet to coincide with the core contract v1.0.1 release after series of testings on the Rinkeby testnet. So far, The protocol has been used on the Mainnet, and no major issues regarding breakages have been recorded. This further strengthens the claim of the smart contract’s integrity. 

Uniswap V2 is superior to its predecessor, Uniswap V1, in the following regard.

Unlike the Uniswap V2, in the Uniswap v3, Liquidity providers do not only put their assets in liquidity pools and spread them evenly along the price curve. They also have the privilege to choose the price range they want to allocate their assets to and earn from fees when the price is within the selected price range.

Imagine that you put 1 ETH and 2,000 DAI in the ETH/DAI liquidity pool, and you choose to put it in the $1,950-$2,050 price range. What you are saying is this:

“Take these assets and put them in the Pool. Whenever someone buys ETH for any amount of DAI between 1,950-2,050 DAI, I get the fees from that swap. If ETH price is outside that range, I don’t get the fees.” 

In V2, there is a minimal chance that the price of your stablecoin Pool, e.g., DAI/USDC, would go out of the $0.99-$1.01 price range, even though your assets would be evenly distributed along the price curve. This causes you to have only a tiny percentage of the total amount of funds as earning fees. In Uniswap v3, it’s different. You deposit 100% of your assets in that $0.99-$1.01 range. This way, it’s not only a fraction of the assets you deposited that is making returns for you but the whole amount. 

For non-stablecoin pools, like the ETH mentioned above/DAI pool, you can’t predict the price range as accurately as you can for the DAI/USDC pool. However, you can select a wider price range to account for ETH price changes – such as $1,950-$2,050. You would not always earn fees, but when you do, you will gain much, much more than in v2 because you are using 100% of your assets, not just a small portion. That’s how concentrated liquidity makes higher capital efficiency possible.

As earlier stated, two people in a pool would get the same amount of fees; so far, ETH’s price stays within the $1,808-$2,215 range. What happens if it goes beyond that?

In this case like this, your liquidity becomes effectively removed from the Pool and is no longer earning fees until you decide to update your range to account for the price change.

There are three main options in this case

Uniswap v1 had a flat 0.30% fees, of which 100% goes to the LPs. Uniswap v2 introduced a 0.05% protocol fee which could be turned on/off.

Uniswap v3 brings a lot more community-governed flexibility through multiple fee tiers:

0.05% – expected for stablecoin pools like DAI/USDC

0.30% – for standard non-correlated pools like ETH/DAI

1.00% – for exotic non-correlated pairs

The Uniswap team added even more flexibility by allowing the governance to include additional fee tiers. Protocol fees are also there, but they are put off by default. However, the governance will be able to turn on the protocol fees on a per-pool basis and set them between 10%-25% of LP fees.

This might be one of the most important uses of NFTs. The liquidity positions of Providers in Uniswap v3 aren’t fungible because they come in different price ranges. ETH/DAI positions at $1,950-$2,050 and $1,900-$2,100 are not the same. The first one comes with higher capital efficiency but also more risk and the possibility of inactive liquidity. This is the main reason why LP positions in Uniswap v3 cannot be represented as ERC20 tokens in the core protocol but rather by non-fungible ERC721 tokens (NFTs). 

Uniswap is undoubtedly the leading Decentralized Exchange and one of the world’s most popular DeFi platforms. Innovative with every new iteration without retaining the bugs of the previous ones.  With Ethereum’s scalability issues being a major problem generally, Uniswap v3 puts more trust in its underlying infrastructure than previous versions. It enables a higher return on capital for its users and brings new possibilities for the development of an ecosystem around it. 

The new features on Uniswap v3 are quite complex and are not so easy to understand by ordinary crypto holders. However, we expect to see developers working on their solutions to make Uniswap v3 more user-friendly and strategy inclusive. 

You can earn o  Uniswap as a liquidity provider. For instance, for every liquidity you provide, you earn 0.3% of the Pool.

Use X*Y =K to determine the pool liquidity. X, Y, and K represent the value of ETH, ERC-20 token, and Constant, respectively. The above equation represents the demand and supply of ETH/ERC-20 tokens, and it uses that to balance the price of the pooled token. 

For more profitable pools, metrics such as volumes, pool ROI, and so on come in handy. 

Impermanent loss is defined as the difference between holding tokens in an AMM and holding them in your wallet. It is a result of token price divergence. The more the divergence, the greater the impermanent loss.

Supplying liquidity on Uniswap is profitable, but you can lose money in some situations if the price moves too much compared to when you hold the underlying assets.

To reduce the effect of impermanent loss within the decentralized finance ecosystem and give users incentives to supply tokens to liquidity pools, Uniswap provides a 0.3% fee for every trade. For liquidity providers, more trading and more volatility mean more money. With enough trading volume on the platform, liquidity providers can accumulate fees to reduce the effect of impermanent loss.

Let’s take an example of an imaginary Mr. Ayo who provided liquidity of $1k Bitcoin and $1k USDC.

If Bitcoin were to double in price, the total assets in your Pool would total $3k. With $2k in bitcoin and $1k in USDC. If you think this is the case, you are a bit wrong. What Uniswap does that it will constantly rebalance the assets, so it would have to sell bitcoin for USDC to reach the equilibrium again, meaning you will have $1.5k Bitcoin and USD 1.5k (not considering transaction fees). In simple words, the change in the price of any of the tokens will cause a rebalancing. 

Since the price of both tokens is not the same, you could lose out on huge gains Because of the rebalancing.

The post Uniswap liquidity mining: How to provide liquidity on Uniswap V2 & V3? appeared first on CaptainAltcoin.

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