Swap it like it’s hot: What’s Uniswap in crypto?

Web3 is all about decentralization, but most crypto traders still rely on centralized exchanges (CEXs) like Binance or Coinbase to buy, sell, and trade digital assets. While CEXs are convenient, they're intermediaries that control users’ funds and require accounts, logins, and identity verification – which is anything but decentralized.

Uniswap (UNI) takes a different approach. As a decentralized exchange (DEX), it allows users to swap crypto directly from their wallets – no centralized order book required. And it’s a popular approach, too. Since launching in 2018, Uniswap has processed over $2.4 trillion in trading volume, making it one of the most influential projects in decentralized finance (DeFi).

In this guide, we’ll explain what Uniswap is, how it works, and factors to consider before using it.

What’s Uniswap?

Uniswap is a DEX built on the Ethereum (ETH) blockchain that allows users to connect their self-custodial wallets and directly swap ERC-20 tokens. Former Siemens engineer Hayden Adams has been the driving force behind the Uniswap Protocol since he began researching Ethereum’s architecture in 2017. Inspired by Ethereum co-founder Vitalik Buterin’s concept of automated market makers (AMMs), Adams envisioned a blockchain-based decentralized application (dApp) capable of securely processing peer-to-peer (P2P) swaps.

Unlike centralized exchanges that rely on order books to match trades, AMM DEXs use smart contracts to automate transactions and record them on the blockchain. Instead of matching individual buyers and sellers, traders swap tokens in liquidity pools – smart contract-governed reserves funded by other crypto users, known as liquidity providers (LPs). To incentivize participation, AMM DEXs distribute a portion of transaction fees to LPs based on their contribution to the pool.

Adams' early work on Uniswap earned funding from the Ethereum Foundation, kickstarting its development. The Uniswap Labs team launched the first version of the DEX in 2018, which has since undergone multiple upgrades. Uniswap V2 introduced flash swaps and improved price oracles, Uniswap V3 introduced concentrated liquidity to help LPs mitigate inefficiencies like impermanent loss, and Uniswap V4 added on-chain limit orders, allowing traders to set specific buy and sell prices.

Building on these advancements, Uniswap has continued to expand across the Ethereum ecosystem and now integrates with Ethereum Virtual Machine (EVM)-compatible networks like Optimism (OP), Polygon (MATIC), and Arbitrum (ARB).

How does Uniswap work? Key features of the Uniswap DEX

At the core of Uniswap’s architecture is the "x*y = k" formula, where “x” and “y” represent two cryptocurrencies in a pair, and “k” is a constant. LPs deposit equal amounts of both tokens into a liquidity pool, which facilitates automated token swaps. Because “k” remains constant, Uniswap dynamically adjusts token ratios to maintain balance as trades occur.

To encourage LP participation, Uniswap distributes a portion of the total trading fees for each token pair to LPs, paid in crypto. Additionally, Uniswap has its own ERC-20 token, UNI, which serves both as a reward and governance token. UNI holders can use their tokens to vote on proposals within the Uniswap decentralized autonomous organization (DAO), influencing the platform’s future development.

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What’s Uniswap used for? 

Uniswap’s primary function is in its name: swapping. While P2P trading has always been its core feature, Uniswap now offers additional services beyond its exchange.

Decentralized trading

Uniswap is a simple way for traders to swap ERC-20 tokens without intermediaries. After connecting a compatible crypto wallet like MetaMask to the Uniswap DEX, traders select a token pair and enter the amount they wish to trade. Once the transaction is complete, Uniswap automatically sends the swapped crypto to their linked wallet.

Initial DEX offerings (IDOs)

Since DEXs don’t have the same strict regulatory or KYC requirements as centralized exchanges, new crypto projects often launch on Uniswap through initial DEX offerings (IDOs), giving investors early access to emerging tokens. That said, the lack of oversight increases the risk of scams, so traders should always research new altcoins carefully before investing.

Liquidity pools

Users can earn passive income on Uniswap by becoming liquidity providers. They do this by depositing a 50-50 token pair into a liquidity pool and earning a share of daily trading fees based on their contribution. This potentially generates yield, but it also carries risks, including impermanent loss, where price fluctuations may reduce potential profits.

UNI token

Launched via airdrop in 2020, UNI is Uniswap’s governance token, allowing holders to vote on key protocol changes, such as UI/UX updates, fee adjustments, and treasury allocations. By staking UNI, participants actively shape the platform’s future so that it remains decentralized and community-driven.

Uniswap Wallet

To optimize the user experience, Uniswap Labs developed a self-custodial mobile crypto wallet, Uniswap Wallet. Like other mobile wallets, users download it to their iOS or Android device and generate a seed phrase to back up their assets. Once set up, users can store, send, and receive crypto directly while staying connected to Uniswap’s DEX.

Unichain L2

In collaboration with Flashbots, Uniswap Labs also created Unichain, a decentralized Layer 2 (L2) scaling solution for Ethereum. Like other L2s, Unichain processes transactions off Ethereum’s mainnet, reducing gas fees and improving transaction speeds.

Pros and cons of Uniswap

As one of DeFi’s pioneer protocols, Uniswap is one of the most reputable DEXs for crypto traders who want an intermediary-free experience. While P2P trading offers many advantages, it’s also important to consider potential drawbacks before deciding how to use Uniswap in your crypto strategy. 

Pros of Uniswap

• No counterparty risk: Like all DEXs, Uniswap doesn’t rely on third parties to facilitate trades or custody assets. Uniswap users retain full control over their crypto at all times.
• Accessibility and user privacy: Uniswap is permissionless, meaning anyone with a crypto wallet and internet access can use it. Also, Uniswap doesn't require KYC verification, which helps users maintain online privacy.
• High reputation and liquidity: Uniswap is one of the oldest and largest DEXs in DeFi, and its trading volumes occasionally surpass major CEXs like Coinbase. This high credibility helps crypto traders feel confident when using the exchange. 
• Access to niche tokens and IDOs: For altcoin hunters, Uniswap provides early exposure to innovative crypto projects before they reach centralized exchanges. Uniswap’s permissionless structure attracts niche and emerging tokens, offering unique trading opportunities.

Cons of Uniswap 

• Complex for beginners: Using Uniswap requires knowing how to manage wallet private keys, calculate and pay Ethereum gas fees, and navigate decentralized apps – without the user-friendly features typical of CEXs.
• No insurance protections: Removing intermediaries from crypto trading also means no built-in insurance protections or customer support if something goes wrong. Users take full responsibility for safeguarding their cryptocurrencies and private keys, with no assistance in recovering lost or stolen assets.
• Impermanent loss: As mentioned earlier, impermanent loss is a real risk for Uniswap LPs. Significant price fluctuations in liquidity pool tokens could result in lower returns than simply holding those tokens.
• Risks of bugs, hacks, or scams: Despite Uniswap’s open-source smart contract code, the exchange isn't immune to hacks and scams. Since anyone can easily create and list tokens on Uniswap without rigorous checks, malicious actors regularly launch fraudulent tokens designed to mimic legitimate projects.

Connect your Uniswap account to CoinTracker 

Uniswap is decentralized, but that doesn’t mean its users are exempt from reporting their activities. Whether trading or yield farming on Uniswap or another DEX or CEX, you must include these transactions on your IRS tax forms. CoinTracker makes this simple by instantly integrating with Uniswap smart contracts and the Uniswap Wallet, giving you a complete audit trail of your crypto transactions. It also calculates gains and losses and clearly separates income from liquidity pools to make the process even easier when you file.

Discover firsthand how CoinTracker’s Portfolio Tracker simplifies your DeFi tax reporting – get started for free today.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.