Uniswap Tutorial and Guide: Fees, UNI Token and Liquidity Removal
The vast majority of Eth network token tutorials are made using Uniswap. Although we make them intuitive, many users ask us for a tutorial on how to use Uniswap, and in this article, we are going to do it, I hope it will help you help.
Introduction to decentralized Uniswap Exchange.
Uniswap is one of the most popular Ethereum – based decentralized exchanges.
As a safe and easy-to-use decentralized exchange with very high liquidity, it is the first choice for trading ERC-20 tokens.
In this review and tutorial, I will show you how to use Uniswap and add and remove liquidity from Uniswap. I will also give you information about Uniswap fees and explain how the UNI token works.
What is Uniswap?
Uniswap is an automated liquidity protocol that allows users to trade tokens from their wallets securely.
Uniswap consists of multi-peer liquidity pools, basically smart contracts on the Ethereum blockchain.
Smart contracts allow various functions such as exchanging tokens, adding/removing liquidity, etc. Thanks to that, you don’t need to rely on anything but the code.
There is no order book on Uniswap. You just need to choose the trading pair and enter the amount of token you will exchange, and then the protocol calculates how much the output will be.
This happens through liquidity pools that contain pools of peer tokens, which require liquidity providers to add an equal value of each token to the pools to maintain the price.
When you trade tokens on Uniswap, the output is determined in a way that maintains Uniswap’s constant product formula.
If you want to make large transactions, you can also check out DEX aggregators like Matcha and 1inch, which aggregate liquidity from various sources, including Uniswap.
Uniswap Fees
When you trade tokens on Uniswap, you will be charged a 0.30% fee. The fee is distributed to liquidity providers in proportion to their participation in the Pool.
When liquidity providers decide to remove their liquidity from the Pool, they receive transaction fees along with their contribution to the Pool, and the liquidity token they received after adding liquidity to the Pool is burned.
The calculation of the fee is quite simple. For example, if you exchange 1 ETH for another token, you will be charged 0.003 ETH (1/100 * 0.3).
In addition to trading fees, you will also pay transaction fees to approve tokens and make trades. If Ethereum gas fees are too high, you can trade on centralized exchanges like Binance.
Other decentralized exchanges have lower trading fees than Uniswap. You can check out Matcha and Balancer for better deals.
Uniswap Compatible Wallets
Since Uniswap is a daapp, you need a cryptocurrency wallet that allows you to interact with dapps to use Uniswap. There are several wallets that you can use to trade on Uniswap.
Uniswap is compatible with MetaMask, WalletConnect, Coinbase Wallet, Fortmatic, and Portis. You can also use Uniswap with mobile wallets like Trust Wallet and Coinomi through WalletConnect.
You can use decentralized exchanges, including Uniswap, much safer with your Ledger hardware wallet.
Uniswap (UNI) token explained – Uniswap liquidity mining
Uniswap launched its own protocol token, Uniswap (UNI), on September 16. A total of 1 billion UNI tokens have been minted, which is the maximum supply of UNI.
UNI tokens will be gradually distributed to the community, team, investors, and advisors over the course of 4 years.
UNI Token Distribution
The exact distribution of Uniswap (UNI) is as follows:
- 60.00% to members of the Uniswap community 600,000,000 UNI
- 21.51% to team members and future employees with a 4-year award 215,101,000 UNI
- 17.80% to investors with the right to 4 years 178,000,000 UNI
- .069% to 4-year vested advisors 6,899,000 UNI
Those who have interacted with Uniswap or provided liquidity to liquidity pools before September 1, 2020, 12:00 am UTC can view and claim their UNI token rewards by connecting their wallets to the dapp.
The UNI token is used for governance and liquidity mining. You can stake your Uniswap LP tokens to receive UNI tokens.
The liquidity mining program is initially only available for ETH/USDT, ETH/USDC, ETH/DAI, and ETH/ WBTC pools.
UNI Token Release Schedule
The UNI token release schedule below can help UNI holders value their UNI tokens and decide whether to sell, hold or buy more.
According to the table below, it will take about a year from now to reach a circulating supply of 500,000,000 UNI tokens.
How to trade on Uniswap?
Trading on Uniswap is quite simple. Since there is no order book on Uniswap, it is much easier for beginners to use Uniswap than many other decentralized exchanges.
Step 1 – Connect your wallet to Uniswap.
To start trading on Uniswap, you must first log in to your wallet, visit Uniswap and click “use Uniswap.”
You can then connect your wallet to the dapp by clicking the “connect to a wallet” button.
Step 2: Trade Tokens on Uniswap
To trade tokens on Uniswap, first, choose the pair and then enter the amount of token you want to trade. You will then see the minimum and the estimated amount of tokens you will receive.
It would be best if you first allowed Uniswap to spend your token by clicking “approve token X” and then confirming this in MetaMask. After that, you can exchange tokens.
Uniswap Slip Tolerance – Uniswap Transaction Settings
To change transaction-related settings while exchanging tokens on Uniswap, click the settings icon on the top right corner of the page.
(The settings icon is now on the exchange form.)
You can change the slippage tolerance ratio and trade deadline to prevent reverse trades.
Be sure to check the minimum amount of token you will receive based on your swipe tolerance before you trade.
If you are going to exchange especially a large amount of tokens, you can use 1INCH exchange. Split orders between various decentralized exchanges like Uniswap, Kyber, and Bancor to achieve the best rates.
How to add liquidity to Uniswap?
Adding liquidity to Uniswap liquidity pools is as easy as trading tokens on Uniswap.
But first, you should check various sources on impermanent losses like Pools.fyi and ZumZoom to find the profitable pools and also consider the risks mentioned below.
Step 1 – Connect your wallet to Uniswap and click Pool
Connect your MetaMask wallet or any other compatible wallet to Uniswap and click on the “group” tab.
After clicking on the “pool” tab, click on the “add liquidity” button to add liquidity to any of the pairs on Uniswap.
Step 2 – Add Liquidity to a Uniswap Liquidity Pool
In order to provide liquidity to a certain trading pair on Uniswap, you must deposit an equal value of each token. You can choose one of the common bases like WITH, USDC, DAI, and USDT.
When you enter the amount of one token, the protocol will automatically fill in the amount of another token. It would be best if you had an equal value of each token in your wallet to supply liquidity to a given pair.
After approving the token that allows Uniswap to use the token, you can click the “supply” button to add liquidity to the Pool.
In exchange, you will receive liquidity tokens that represent your position/liquidity in the Pool and start earning trading fees.
You can view the pairs you provided liquidity to in “your liquidity” and remove your contribution from the Pool at any time, which will also include any accrued fees.
How to remove liquidity from Uniswap?
Once you have added liquidity to a Uniswap pool, you can remove your liquidity from the Pool to get your tokens back along with any accrued fees.
To remove liquidity from Uniswap, please follow the steps below.
Step 1 – Connect your wallet to Uniswap and click Pool
Connect MetaMask or any other wallet you use to Uniswap and click on the “group” tab located on the top left corner of the page.
In the pool tab, you can see your liquidity. If it is not visible, you can try to import it.
Step 2 – Remove liquidity from a Uniswap pool.
Choose the amount of liquidity you want to remove from the Pool, click the “approve” button and sign the message in MetaMask.
After that, click on the “remove” button to remove your liquidity from the Pool. Your LP tokens will be burned, and you will receive your tokens along with the accumulated fees.
Since the Pool’s price and number of tokens have changed, you will receive a different number of tokens, and there will be a non-permanent loss.
Uniswap Impermanent Loss Explained
To provide liquidity to a pair on Uniswap, you must deposit an equal value of each pair token in the Pool.
For example, if you will provide liquidity to the BAT/ETH pair and have $100 worth of BAT in your wallet, you will also need $100 worth of ETH.
The number of tokens you need to deposit is automatically calculated based on the exchange rate when adding liquidity.
Slippage of the pair’s initial exchange rate in either direction will result in what is called an impermanent loss.
If the rate continues to change in one direction, your temporary loss will increase. If the rate returns to its original state, your loss will be close to zero.
Well, how does this happen? Some arbitrators make money from these price changes and adjust prices on Uniswap. But the profit they make is basically the money that belongs to the liquidity providers.
If both BAT and ETH rise or fall in value at similar rates, you will not suffer temporary losses and lose a lot of money since the initial exchange rate will not change much.
But, if one of the tokens increases or decreases too much in value compared to the other token, the change in the exchange rate will be more remarkable, and you will lose more money.
On the other hand, the more trading that happens, the more commission you earn as a liquidity provider on Uniswap. But the fee you earn may not exceed your temporary loss depending on the degree of slippage.
