How to Stake Uniswap
Staking Uniswap is unlike other forms of cryptocurrency staking, such as Ethereum staking. In our article, how to stake Ethereum, we explain that all you have to do is buy a stake in Ethereum. A few other cryptocurrencies are the same.
But, with Uniswap, it's a little more complicated. However, once you understand how to stake Uniswap, it's not hard to grasp the concept.
Uniswap is fully decentralised. It's not owned or operated by one entity, and it uses a unique process called automated liquidity protocol.
In 2018, the Uniswap platform was built on top of the Ethereum blockchain, the second-largest cryptocurrency by market capitalisation. It is compatible with ERC-20 tokens and infrastructures like wallet services MetaMask and MyEtherWallet.
In this article, you will learn how Uniswap works. You'll discover how you can create a passive income from staking in liquidity pools with Uniswap and earn a percentage of the fees from Uniswap users.
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- What is Uniswap?
- How Does Uniswap Work?
- What is an Automated Liquidity Protocol
- How Token Price is Determined
- How Do I Use Uniswap?
- How Do I Get Started Using Uniswap?
- Uniswap's UNI Token
- Recap of How to Stake Uniswap
What is Uniswap?
Uniswap is an automated liquidity protocol. A constant product formula powers it, and it creates liquidity and trading for ERC-20 tokens on Ethereum.
Think of Uniswap like a middle man, cutting through the unnecessary red tape to provide fast and efficient trading. It is open-source software and licensed under GPL.
Because Uniswap is open-source, anyone can copy the code for creating a decentralised exchange, and you can list tokens for free on the exchange.
In addition, you maintain control of your funds, unlike centralised exchanges requiring traders to give up control of their private keys. Typically, with centralised exchanges, orders are logged onto an internal database instead of a blockchain, which can be more expensive and time-consuming.
With control of your private keys, it prevents the risk of losing your assets if the exchange suffers a cyberattack.
How Does Uniswap Work?
Uniswap is an exchange protocol allowing users to swap ERC-tokens, which Uniswap pools into smart contracts. Users then trade against the liquidity pools. Anyone can add tokens to a pool that then earns fees. Or you can swap or list a token on Uniswap.
Each pool is a smart contract with no centralised party or facilitator for the trade. The smart contract has several functions that work to add liquidity and enable swapping tokens. Each smart contract is a pair managing a liquidity pool made up of reserves of two ERC-tokens.
You can become a liquidity provider (LP) for a pool simply by depositing the equivalent value of the underlying token in return for pool tokens. The tokens track (pro-rata) the LP shares of total reserves. You can redeem for the underlying assets at a time you choose.
Most crypto trading is done on centralised exchanges like Coinbase, for instance.
When you deposit funds, your money is under control by the exchange, and they use a traditional order book for trading. The order book has buy and sell orders waiting to be matched with opposing orders.
If liquidity is not available, there are delays in executing your order, which could mean the difference between profit or loss.
For example, if you wanted to sell one ETH for $1500, you would need a buyer on the other side of the order book who wants to buy one or more ETH at $1500.
This system relies on liquidity, which depends on the number of orders for ETH queuing up in the order book. If there are more buyers than sellers, liquidity dries up and vice versa. So, orders cannot be fulfilled until one order lines up with another.
But Uniswap is entirely different.
How Uniswap Works
Uniswap runs on two smart contracts:
- An Exchange contract
- A Factory contract.
These are automated computer programs designed for specific functions under certain conditions.
The factory smart contract is for adding tokens to the platform. The exchange contract facilitates all of the token swaps.
You can swap any ERC-20 token for another on the Uniswap platform.
What is an Automated Liquidity Protocol
Uniswap wants its users to become liquidity providers (LPs), and so they offer incentives. Uniswap users pool their money together, thus creating a fund used to execute trades on the platform.
Each listed token has a pool of its own, and users can contribute to it. The computer uses an algorithm to calculate token prices. As a result, traders do not have to wait for an opposing order to match their buy or sell.
This liquidity means that orders are instantly executed as long as there is sufficient liquidity in the pool. In addition, each supporting LP receives a token representing their staked contribution to the pool.
For example, if you contributed $5000 to a liquidity pool with $50,000 of liquidity, you would receive a token representing 10% of the pool.
You can redeem your token for a share of the trading fees. Uniswap charges a fixed 0.30% fee for every trade, which goes to a liquidity reserve. If you decide you no longer want to be an LP, you receive a portion of the fees relative to your stake in the pool.
After Uniswap did an upgrade, they introduced a new fee structure that a community can vote to turn on or off.
Uniswap sends 0.05% of the fixed 0.30% fee to a fund for financing the future development of Uniswap.
How Token Price is Determined
Uniswap uses an automated market maker system, which calculates the price of each asset by assessing the value of the lowest seller and highest buyer. It uses a mathematical equation to determine supply and demand, measuring how many coins there are in a pool and then calculating a price.
When you add a new ERC-20 token to Uniswap, you have to add an equal amount of another ERC-20 token because this is the only way to start a liquidity pool.
The equation to work out the price of each token is x*y=k.
Token A amount is x
Token B amount is y
K is a constant value, which does not change
For example, Sarah wants to trade LINK/ETH - LINK (chainlink) for ETH (ether). So she adds a large amount of LINK to the pool, thus increasing the ratio of LINK to ETH.
Remember, the value of K MUST remain the same. So, in this instance, the cost of LINK decreases in the pool and the cost of ETH increases.
If Sarah adds more LINK, the less ETH she gets in return because the price of ETH rises when more LINK enters the pool.
There are a few anomalies.
The size of the liquidity pool determines how much the price of the token changes during a trade. The larger the pool, the more liquidity, which means that trade sizes can be larger and executed without delay.
Read Also: Top Tools for Crypto Trading
Arbitrage is where there are price inconsistencies across multiple exchanges. These discrepancies can create profits. Therefore, arbitrage traders are essential to the Uniswap ecosystem.
For example, if Ethereum was trading on Kraken for $1900 and Binance for $1850, you could buy Ethereum on Binance and sell it on Kraken for a $50 profit.
If arbitrage occurs with large volumes, the potential profits can be considerable, and it's low risk.
On Uniswap, arbitrage traders look for tokens trading above or below the average market price and they will buy and sell them to create profits. They may continue arbitrage trading until the prices balance out and there is no further potential for profit.
Arbitrage trading helps Uniswap by keeping its token prices in line with the rest of the market.
How Do I Use Uniswap?
You will need an Ethereum wallet and some ETH tokens, and the Uniswap app so that you can use the protocol for liquidity or swap tokens.
The fee for each transaction on Ethereum is ETH, and this fee (called the gas fee) goes to Ethereum miners who keep the Ethereum network running.
It's easy to get started with Uniswap. Start with an ERC-20 supported wallet.
There are a few available, such as:
- Coinbase wallet
- Portis MetaMask
Once you have an ERC-20 wallet, you need to add ETH to trade on Uniswap.
You also need this to pay for 'gas' (the term for Ethereum transactions). Gas prices vary according to how many people are active on the network.
You have some influence over the prices because you can choose slow, medium or fast transactions. The quicker the transaction, the higher the gas fee. It's like the difference between the price for standard parcel delivery for a or choosing a 24-hour delivery. You pay more for faster service to receive your physical order, from, say, Amazon, for instance.
How Do I Get Started Using Uniswap?
- Go to the Uniswap website
- In the top right corner, look for Use Uniswap
- Click on Connect Wallet (top right corner0
- Select the wallet you have and connect it to Uniswap
- You now have an option to swap tokens directly. You will see a drop-down menu where you can make your choice
- Choose the token that you wish to swap and click on swap
- A preview window will appear, showing the transaction and will ask you to confirm the transaction to your ERC-20 wallet
- All you have to do now is wait for your transaction to be added to the Ethereum blockchain.
You can check the progress of the transaction by pasting the transaction ID into https://etherscan.io/
Uniswap's UNI Token
UNI is Uniswaps native token and was created in September 2020. Uniswap is currently listed as #11 on Coinmarketcap
When you hold UNI, you have the right to vote on platform changes and new developments. You can even vote on how minted tokens are distributed to the community and its developers. And you can vote on changes to fee structures.
The UNI token was created to prevent users from defecting to the rival DEX SushiSwap, a fork of Uniswap.
SushiSwap offered an incentive of SUSHI tokens to Uniswap users to relocate their funds to the new platform.
But Uniswap created 1 billion UNI tokens and distributed 150 million of them to anyone who had ever used the platform.
Every person received 400 UNI tokens, which was worth over $1000 at the time. Today, with the price at $16, a holding of 400 UNI is worth $6,400.
Recap of How to Stake Uniswap
Liquidity staking with Uniswap is a unique process using automated liquidity protocol.
To take part in Uniswap liquidity staking, you need ETH and an ERC-20 secure wallet. Then, you can exchange (swap) your ERC-20 tokens by taking part in Uniswap liquidity pools.
Uniswap helps create high liquidity for trading by eliminating the traditional order book system and creating liquidity pools for each ERC-20 token.
Each pool is a smart contract with a combination of ETH and another ERC-20 token. For example, LINK/ETH.
There is no limit on your investment into a liquidity pool. The more you put in, the lower the price of your deposited token and the other token increases.
You have complete control of your funds because Uniswap is fully decentralised.
Staking Uniswap is unlike any other form of cryptocurrency staking. Still, once you've figured out how to do it, you can make a passive income from your ERC-20 tokens by placing them in liquidity pools with Uniswap.
There are arbitrage opportunities on Uniswap by checking inconsistent pricing n other exchanges and offsetting the differences.
Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.
Trading or investing in cryptocurrencies may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.
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Is it worth Staking Uniswap?
You can literally put your ERC-20 tokens in a liquidity pool and earn a percentage of the fees paid by Uniswap users. The bigger the pool, the more Uniswap user fees.
So, yes, if you'd like a passive income from your cryptocurrencies, liquidity staking can be a good investment.
How Much Can I Earn Staking Uniswap?
Currently (2021), you might expect to earn a baseline of 4% APY
Where Can I Buy Uniswap UNI?
You can now buy Uniswap from a few places:
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- Binance - the worlds largest cryptocurrency exchange
- Kraken – an established cryptocurrency exchange
Does Uniswap Have an Active Community?
Yes, Uniswap has an active community with: