Trading on Uniswap – Part 1

Defi is taking over crypto space. Let’s learn how to use Uniswap to the fullest potential. This first part will cover all the basics and tools that you need. 

Many new people in the crypto space usually start out purchasing and trading their coins using centralised exchanges. These digital juggernauts are fast, convenient and host a plethora of crypto currencies suitable for all tastes and investment strategies. Since 2020 however a new kid on the block has completely taken the crypto space by storm and caused a true tectonic shift of innovation. Uniswap has made the process of purchasing cryptocurrencies as simple as making an order on Amazon. And best of all, it’s actually all just open source software operating on the blockchain without fancy offices, battalion of lawyers and even an army of customer support staff. Many people are reluctantly  “allergic” to DEFI, however after this tutorial, you will master this new tech like a shaolin monk. Let’s gather the weapons and step into the decentralised finance dojo. 

What is Uniswap? 

In short, Uniswap is an automated market maker. Don’t let the technical lingo fool you! It’s just a software program ( working on the Ethereum network ) floating around on the internet. It connects buyers and sellers from across the world in a decentralized way. Literally millions of dollars worth of value ( in crypto currency ) are exchanged there every minute. 

On traditional exchanges we are working with an orderbook where  buyers and sellers meet in the middle and set the price for any asset at any given time. Think of a heated haggling session at a Middle Eastern bazaar. This is how it was done for centuries. The liquidity ( money and assets ) has been always provided by the so called “market makers”. If you don’t have a vendor who’s selling goods and you have no buyer waving cash in his hand, you literally have NO market. It’s as simple as that. The liquidity simply means a pool of money and assets that are made available to the market participants. 

Classic cryptocurrency exchanges work in exactly the same manner. The exchange is working as a market maker and provides liquidity ( a whole lot of crypto currency ) to the potential buyers and sellers. It’s a system that works relatively fast and smooth, however there are still drawbacks. The main drawback is that not everyone is welcome on centralised exchanges. It’s difficult to believe, but there are still many countries that restrict their citizens from investing in cryptocurrency. These countries range from places like the US to even North Korea. This status quo has been at play ever since Bitcoin was born in 2009. 

With one kick in the door, Uniswap literally destroyed the “barrier to entry” with locks of KYC and hinges of regulation dangling from it. It has opened crypto currency trading and investing to one and all. The system here is quite different from centralised exchanges, but most importantly it literally welcomes ANYONE with an internet connection to join the fun. Imagine you are sitting on some Ether ( ETH ) and you would like to swap it for Tycoon tokens ( TYC ). Instead of order books and classic market wizardry, we are working with “Liquidity pools”.

 A liquidity pool is just a collective stash of crypto currency that’s being made available to the market. You literally “dive” into the ETH liquidity pool and you jump out on the other end holding TYC tokens. The system is as brilliant as it is simple. People who are holding BOTH assets ( in our case ETH and TYC token ) come to the open market and “deposit” their coins in a 50/50 ratio into a liquidity pool. 

The market makers in this case are not huge nameless glass and concrete corporate juggernauts, but they are people like you and me. Even your aunt Gladys can participate and be a liquidity provider if she’s rocking ETH and TYC tokens that she wants to put to work. Literally anyone in the world can make fast and decentralized transactions, while they pay your aunt a commission fee of 0.3% for her precious liquidity. How’s that for decentralization? 

Why use Uniswap in the first place? 

The answer is very simple. Literally ANYONE is welcome on Uniswap to trade any ERC20 token for another one. There is literally no KYC ( identity verification ) and other formalities that are usually present at centralised exchanges. Many people these days have fallen under “restrictions” and cannot have access to purchasing and selling crypto currency at their leisure. This is why decentralized exchanges are slowly gaining momentum and will eventually come to rub shoulders with the big boys. 

Aside from the worldwide inclusiveness, Uniswap can pound its chest as being one of the MOST user friendly exchanges to work with. It literally borrows the time tested philosophy of a toilet in a fast food joint. You come in, do your business and leave. That’s it. No need to linger around and fill out forms, send 2FA verifications codes and prove to one and all that you are not a zebra. It’s a blitzkrieg / guerilla style of trading now wrapped into a nice and simple to use package. 

Last and most important reason why you should consider using decentralized exchanges like Uniswap, is because you actually deal with REAL cryptocurrency DIRECTLY on the blockchain, meaning your transactions are executed in real time with real assets. The risk of losing your coins due to a foul play of some crooked exchange is 100% eliminated.  What’s not to like right? Hold on just a second! Using Uniswap ( or any decentralized exchange for that matter ) carries a certain degree of awareness that we must always keep in mind and that will be addressed in the second chapter. For now, let’s not waste any time, grab some stationary and get to work on opening your window into the decentralized world. Let’s roll! 

Preparation – You will need … 

 

 

The best way to avoid analysis paralysis is to simply jump right in and set up your DEFI interface. It literally takes only a few minutes. Here is what we need for proper work on Uniswap. 

  •  A desktop or laptop computer Yes, at this time you can off course use your mobile device for most of your crypto needs, but we have to keep in mind that the best and most efficient results are still achieved using a normal pc or mac. Mobile functionality will off course be the way of the future, but at the moment we are just getting started, so let’s do it properly. 
  • Brave or Google Chrome browser( Uniswap is a web3.0 application that can be accessed via your internet browser, that means it needs your Chrome or Brave browser to run on ). Most people are already using Chrome, so the installation is very straight forward even for a non technical person.  
  • Metamask Wallet( https://metamask.io We highly recommend you only use this link, because many fake versions of Metamask have been circulating on the internet! ). Metamask is a web 3.0 wallet that will interact with ANY decentralized finance applications such as Uniswap. The desktop version of this wallet will live inside your Chrome / Brave browser as a simple plugin and will work just like any other hot wallet out there. What’s important to know about Uniswap, is that first of all it was developed to be used with ERC20 tokens ( cryptocurrency built on the Ethereum network ). These days one can easily use Metamask wallet for other smart chains such as XDAI, BSC and MATIC. During the installation it’s self explanatory that you have to back up your 12 word recovery phrase AND a bulletproof password on at least 3 pieces of paper that must be kept at different locations. A bit extreme yes, however in the crypto space only the paranoid survive. 
  • Uniswap interface( https://uniswap.org We highly recommend you bookmark this page in your browser. Many fake versions of Uniswap have been circulating lately ) If you are used to working with centralised exchanges such as Kraken, Coinbase or Binance, you will notice that Uniswap looks surprisingly simple and intuitive. You select the coin A and coin B and you simply swap one to another. Done deal. We will look closer into the Uniswap interface in the second chapter. The best part of using this decentralized exchange is that it requires no identity verification whatsoever. Literally anyone with an internet connection is welcome to trade here. 
  • Ether cryptocurrency ( ETH ) in order to pay for the GAS fees. That’s right! Centralised exchanges actually don’t use real cryptocurrency for trading. What you buy and sell are just derivatives of real coins deposited into an exchange. On Uniswap however we will be working directly on the blockchain. This off course requires Ether in order to pay for every transaction ( just like you would pay Ethereum gas fees for sending your tokens from one address to another ). Let’s stock up on Ethereum and keep an eye on those pesky gas fees via the numerous gas fee trackers. The Ethereum blockchain explorer ( Etherscan ) displays the current gas fee at the top left corner at any given time. 

Now that you have everything ready, let’s move on and discover the best tool that you can use together with Uniswap; a web 3.0 wallet. If you want a glimpse of how things will be done in the future, look no further than Metakask Wallet. 

Metamask Web 3.0 wallet

 

 

Now that your Chrome ( or Brave ) browser is installed and your Metamask wallet is sitting proudly in the top right corner together with all your other plugins and you have diligently bookmarked all the links in order not to stumble on a fake version, it’s time to get to know your wallet a bit better. 

First of all when you set up your new Metamask wallet, ALWAYS write down your 12 word recovery phrase ( and your bulletproof password ) on at least 3 pieces of paper. This step cannot be understated. Your 12 word recovery phrase is literally THE ONLY WAY TO RECOVER YOUR WALLET AND YOUR COINS if your computer breaks down. To give you an idea how important it is, consider the following; out of the 21 million Bitcoin that can be produced until the year 2140, more than 4 MILLION coins have already been IRRETRIEVABLY lost due to the ignorance and negligence towards proper wallet backup procedure. If you remember only one thing from this article, remember this procedure and make it your new religion; All hail the sacred backup! Amen. 

Don’t be that guy who made a killing in crypto only to lose it all due to this simple and avoidable mistake. Also usually the scammers will always go out of their way just to get their hands on your 12 word recovery phrase and your private keys. This is why you have to keep this treasure more secret than Coca Cola’s recipe. Oh by the way did we mention to write down your recovery phrase and password on 3 pieces of paper? You get the pont. Let’s move on. 

Inside your metamask wallet you will see your Ethereum address ( it usually starts with “0X… “ ). This is the account we will be working with. You are the sole owner and guardian of this account. Please take it seriously and take good care of it. Your account is what will eventually connect to Uniswap and will allow this exchange to deposit the coins and tokens that you have just traded for ETH. 

The buy button is not needed, since we don’t want to use the purchase option of Metamask ( which costs an arm and a leg by the way ), but we will solely use this wallet to interact with Uniswap later on. Now we can finally send some Ether to this account in order to “fuel up” our mean DEFI machine. 

Before sending a full amount of Ether to your Metamask wallet, it’s generally a good practice to always send a SMALL test transaction first. This way you will be 100% sure that your coins arrive safely. Remember that in crypto ALL transactions are irreversible! It’s ok to make some mistakes, so let’s keep these mistakes cheap by using small test transactions at all times. This goes for pretty much all transactions when dealing with cryptocurrency. We send a small transaction, verify that it has arrived safely and only then we send the complete amount. It’s a good practice to make it a habit. The religious crypto gospell just expanded by another new mantra. Always use test transactions first! 

It’s also worth mentioning that the sneaky developers of Metamask have managed to build a token exchange right into their wallet in order to divert attention away from Uniswap and other decentralized exchanges. While being convenient, it’s quite expensive to use, therefore we won’t even cover it here. Let’s not fall into this “convenience trap” of one stop shopping. It will come at a hefty price; ignorance! Now you have your Metamask wallet topped up with Ether ( with a small test transaction followed up by the main one, remember? ), pretty much 90% of all the hard work is done. Congratulations on your effort. Everything is looking peachy. 

Being ready to learn

If you are a bit overwhelmed, it’s perfectly fine! Remember Rome wasn’t built in a day and you shouldn’t feel sad just because something is not clear to you. It’s important to know that there are many amazing tutorials on the functionality of Metamask and you are welcome to explore them at your own pace. 

At this time just relax, have a coffee and explore everything in the manner that suits your style. There is no rush and it helps to do it right from the first time. This is not high school. There are no tests, no grades and no exams. There is only effort and results. You are encouraged to make mistakes along the way. 

The habit of using small test transactions will keep your mistakes small ( and cheap! ), while your diligence in regard to the safety of your 12 word recovery phrase and your private keys ( as well as bookmarking important web pages ) will keep you safe from scammers and other attackers. Let’s proceed to chapter 2 and make our very first transaction shall we?