Uniswap and Alternatives: How to Swap Crypto and Provide Liquidity

Uniswap has long since become a basic DeFi tool. It allows you to freely swap tokens without involving exchanges and at the same time gives you the opportunity to provide assets to liquidity pools, earning a share of the fees. Behind the simple interface stands AMM mechanics, pool operation and the impact of impermanent loss, so let’s break down how everything works and which points really require attention.

In this article you will learn:

• how a DEX works and how it differs from centralized exchanges;
• how to exchange cryptocurrency without an exchange via Uniswap and similar platforms;
• how liquidity in a DEX is structured, why LP tokens are needed and what can affect the final result.

The material will help you understand the logic of Uniswap and other DEXs so that swaps and adding liquidity are perceived not as “magic” but as a working system with its own advantages and nuances.

If we put everything into a single explanation, the easiest way to think of what Uniswap is, is as a decentralized protocol on Ethereum that doesn’t work like a website or a company but as a set of smart contracts. These contracts themselves enforce the rules of exchange, so connecting a wallet becomes the only step the user needs to take.

To understand how this differs from classic platforms, it’s convenient to compare how centralized exchanges and DEXs operate:

CEX (for example, Binance, Bybit)

• registration and KYC are required;
• funds are stored in exchange accounts, which makes the model custodial;
• trading takes place via an order book where buyers’ and sellers’ orders meet.

DEX (Uniswap):

• connecting a wallet replaces registration and verification
• funds remain with the user, and the smart contract only executes the swap
• the exchange takes place via liquidity pools, and the price is set by an algorithm

These differences help you understand whether to choose a DEX or a CEX, because a DEX provides full control and anonymity, while a CEX offers service functionality and a familiar interface. For beginners, Uniswap often becomes their first Web3 experience, since interaction goes directly through the wallet and does not require trust in intermediaries.

The protocol’s operation is built on the AMM model, which replaces the usual order book with a liquidity pool. Anyone can add their tokens there, and traders swap directly with this pool.

This approach provides several notable advantages:

• the user controls their funds and can disconnect the wallet at any moment;
• it is enough to own the seed phrase to maintain privacy;
• access to a wide range of tokens, including the newest DeFi projects.

Thanks to this logic, Uniswap has become a convenient entry point to decentralized exchange, and liquidity pools have replaced orders and allowed the AMM model to exist without intermediaries.

A swap can be seen as the most basic operation on a DEX. The user selects the token they are giving, for example ETH, and the token they want to receive, for example USDC.

During the trade a simple sequence of actions takes place:

• your ETH is sent to the pool;
• the smart contract gives you a portion of USDC from the same pool;
• the balance inside the pool changes and the algorithm updates the price.

The pricing model is based on the formula x * y = k. In it:

• x denotes the amount of the first token;
• y shows the amount of the second token;
• k remains a constant value and reflects the overall level of liquidity.

If ETH is taken out of the pool, the x value decreases, so y increases and ETH becomes more expensive relative to USDC. The less of a token remains in the pool, the higher its price. This principle underlies token swaps in DeFi on Uniswap and other AMMs, and there is nothing complicated here — just a smart contract and clear math.

When you move on to practice and start figuring out how to use Uniswap, the process looks very simple. The steps are usually as follows:

• connect a MetaMask, Rabby or another Web3 wallet;
• select the token you give and the token you want to receive;
• enter the amount and check the final rate;
• set Slippage, usually 0.5–1% is suitable for liquid pairs;
• confirm the transaction in the interface and in the wallet.

To understand how Uniswap fees are formed, it is important to distinguish between two types of costs:

• Ethereum network gas, which depends only on blockchain load and goes to validators;
• LP Fee, a fixed percentage within the pool that liquidity providers receive.

This mechanism makes a full-fledged cryptocurrency exchange without a centralized exchange possible, because the user pays only network gas and a pool fee, while still fully controlling their keys and funds.

For swaps to work without delays, the protocol must have a sufficient reserve of assets, so most often users start with the question: what is a liquidity pool. You can think of it as a smart contract that stores a pair of tokens in a certain proportion.

Usually these are equal shares by value, for example 50% ETH and 50% USDC. During swaps, traders take tokens directly from this “pot”, so cryptocurrency liquidity in simple terms is the amount of funds available for instant swaps.

Such pools are filled by liquidity providers, essentially ordinary users. They deposit two coins in an equal ratio, receive a share of the fees from each trade and take on the price risks associated with market movements.

When a user adds their tokens, the smart contract issues them a special asset, and this is the moment when it becomes clear what LP tokens mean. This is not a separate coin but a kind of receipt that confirms your share in the pool and allows you to later withdraw your tokens back together with the accumulated fees.

As long as you hold the LP tokens, you are a co-owner of a part of the pool, and losing them automatically means losing access to your liquidity.

The main principle to remember before entering a pool is that funds are deposited in pairs and always in equal dollar value. This is easy to see with a simple example.

If you want to add liquidity to the ETH/USDC pair and you know that 1 ETH is worth $3,000, then to enter you will need to deposit exactly 1 ETH and 3,000 USDC. You cannot deposit just one token, because the smart contract automatically maintains the balance of the pair.

When you move on to practice and start figuring out how to add liquidity on Uniswap, the process is fairly straightforward. You need to open the Pool section on Uniswap, select a suitable pair, for example ETH/USDC, specify the amount of one of the tokens, after which the protocol will calculate the second part automatically.

Then an Approve is executed, which allows the smart contract to work with your tokens, and after confirming the transaction via the Supply button, the liquidity appears in the pool. LP tokens are immediately displayed in the wallet and confirm your share.

The income is formed simply, and here it is easy to see how earnings on liquidity pools work. Each trade within the pool brings a fee, for example 0.3%, and all these fees accumulate in the common pool.

You receive a portion of these funds according to the size of your share, which is recorded by the LP tokens. A higher trading volume in the pool usually leads to higher profit, although holding liquidity for a long time also means staying under price risk for a longer period.

The main threat for liquidity providers is Impermanent Loss. In addition to it, there are other DeFi risks related to smart contracts and token quality.

To understand the scale of potential consequences, it is convenient to break down impermanent loss in simple terms. This effect appears when you have deposited a pair of tokens into a pool and then one of them changes its price sharply. At the moment you exit the pool, the final value of your assets may turn out to be lower than if you had simply kept them in your wallet.

An example helps to see the difference in numbers. Let’s imagine that you deposited 1 ETH worth $3,000 into the pool and added 3,000 USDC. The total investment amount is $6,000.

The price of ETH rises to $6,000, and arbitrageurs start buying ETH from the pool, topping it up with USDC until the price matches the market price. The balance of your share changes and instead of 1 ETH and 3,000 USDC you receive about 0.7 ETH and 4,200 USDC.

The total amount is $8,400 and at first glance this is a profit. But simple HODL would give you $9,000, because 1 ETH is now worth $6,000. The $600 difference is Impermanent Loss. It remains notional as long as you don’t withdraw liquidity, and becomes a real loss when you exit.

In addition to Impermanent Loss, there are several additional threats that are important to consider when working with pools:

• a hack or error in the smart contract, especially when it comes to young and poorly audited DEXs;
• Rug Pull, when the token creator simply removes all liquidity and leaves users with worthless assets;
• poor token quality or low trading volume, which leads to high volatility of the pool share.

These factors show that working with DEXs requires attentiveness. Liquidity pools should not be perceived as a guaranteed way of passive income, so every decision needs to be made taking into account all potential DeFi risks.

Uniswap operates on a simple and clear AMM scheme, but it is far from the only platform where you can swap tokens and add liquidity. There is already a whole range of protocols on the market that many see as full-fledged Uniswap alternatives, each with its own features.

To make navigation easier, it is convenient to divide them by purpose:

• protocols with low fees;
• specialized solutions for stablecoins;
• multichain DEXs;
• liquidity aggregators.

PancakeSwap has become the main DEX on the BNB Chain and attracts users with several clear advantages:

• gas fees are significantly lower than on Ethereum;
• a large number of tokens and farms are available;
• the AMM logic fully matches Uniswap’s approach.

The low cost of transactions makes the platform especially attractive for those who are looking for a more accessible DeFi and are studying a PancakeSwap overview before choosing an ecosystem.

When it comes to Curve Finance and what it is, the easiest way is to think of it as a protocol tailored for working with stablecoins. It offers:

• pools that use pairs such as USDC, USDT, DAI and other stables;
• a special formula that reduces slippage and minimizes Impermanent Loss;
• a stable model chosen by users with large stablecoin volumes and minimal tolerance for price fluctuations.

This structure makes Curve one of the most efficient solutions for working specifically with stablecoins.

SushiSwap started as a Uniswap fork but over time turned into a multichain DEX. Users usually highlight several of its features:

• support for different networks, including Ethereum, Arbitrum, Polygon and others;
• classic swaps and liquidity pools;
• the ability to stake the SUSHI token and additional tools for working with DeFi.

Thanks to this, SushiSwap has become an independent ecosystem rather than just a Uniswap copy.

For those who want to get the best rate without manually comparing different DEXs, it’s useful to understand how 1inch works. The mechanics are simple:

• it is a liquidity aggregator, not a DEX;
• it analyzes dozens of pools and protocols such as Uniswap, SushiSwap and Curve;
• the swap route is automatically split into several parts to minimize slippage and find the optimal price.

This approach removes the need to manually choose a platform for a swap, because 1inch does this by itself and immediately shows the most favorable option.

All these solutions are developing in parallel and give users a choice. Some choose minimal fees, others care about working with stables, and some prefer multichain. But regardless of preferences, each of these solutions has already become part of the DeFi infrastructure and expands the possibilities for swapping and managing assets.

Even if the mechanics of how a DEX works are already clear, it is important to follow simple security rules, especially when you are exchanging cryptocurrency without a centralized exchange and fully managing your assets. Such rules help to avoid unnecessary risks and make working with Web3 more calm.

• Token address check
  A token name is often misleading because clones easily copy tickers and logos. To avoid mistakes, it is better to take the contract address from CoinMarketCap, CoinGecko or the project’s official website. It is also useful to double-check the network, whether it is Ethereum, Arbitrum, BNB Chain or any other.
• Careful Slippage
  A high slippage percentage creates room for sandwich attacks, when bots insert their transactions before and after yours. For liquid tokens, 0.5–1% is usually enough, and you should only increase Slippage when liquidity is low or the price is moving too sharply.
• Caution with new pools
  Adding liquidity to pairs with dubious assets can result in loss of funds. It is especially important to avoid pools with unknown tokens, no audits or low TVL. These are exactly the combinations that most often result in Rug Pulls.
• Checking TVL and audits
  Before you start using a protocol, it’s useful to assess the total value locked and review audit reports if they are available. High TVL usually indicates user trust and reduces the likelihood of unpleasant surprises.
• Revoking old approvals
  Over time, approvals that you have granted to different applications accumulate, so it is useful to periodically visit services like Revoke.cash and check which contracts have access to your tokens. Removing unnecessary approvals reduces the attack surface and increases wallet security.

These actions take little time but help maintain basic hygiene when working with DEXs and keep control over your assets.

In the TRON ecosystem, DEXs operate on the same principles as on Ethereum, although token standards here are different, in particular TRC-20. Because of this, users interact with other platforms, but the AMM logic remains recognizable.

The main solutions in the TRON network look like this:

• SunSwap is the main DEX and in fact works as a Uniswap analogue on TRON;
• JustMoney and other AMM platforms support pairs with TRX, USDT (TRC-20), BTT and other tokens.

The user connects a TronLink or another compatible wallet, selects the necessary pairs and performs swaps or adds liquidity. The mechanics fully repeat classic AMM processes where pools and LP tokens are used.

Fees on TRON are structured according to a special model, because each transaction consumes Energy and Bandwidth resources. If these resources are insufficient, the network starts burning TRX as gas.

With regular swaps on SunSwap or frequent USDT transfers, you can optimize fees by 65% using TRON energy via the Tron Pool Energy service. This makes it possible to use the blockchain’s resources directly, reduce transaction costs and avoid locking large amounts of TRX solely to obtain resources.

Uniswap and other AMM DEXs have significantly changed the market because they have given every user the opportunity to connect a wallet and exchange cryptocurrency without a centralized exchange, without relying on intermediaries. This approach has made Web3 much more accessible, but a convenient interface does not eliminate the need to understand protocol mechanics.

To confidently use DEXs, it is important to understand several fundamental things:

• how the x * y = k formula works and why it sets the price in the pool;
• how fees are formed and what LP token yield consists of;
• why Impermanent Loss can eat up part of the profit and sometimes makes the strategy worse than simple HODL.

Liquidity pools are suitable for those who are ready to analyze risks and do not see them as an analogue of a bank deposit. DEXs have long been an important part of DeFi, and the better you understand the mechanics of Uniswap and other protocols, the more balanced and safer your decisions in Web3 will be.