Trading and earning from liquidity pools on Uniswap

Dr. Maximilian Muelke
Sep 3 · 5 min read

It’s official: On the 9th of September at approx. 4 pm UTC, our new TXL (ERC-20) token gets listed on Uniswap. To help you understand how Uniswap works, here is a quick explanation.

You can find Uniswap’s TXL prices, liquidity, volumes and other information here. And for swapping/trading/liquidity you will be able to go directly here.

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Unlike Binance, KuCoin and other centralized exchanges, Uniswap is a completely decentralized exchange. That means you do not send tokens to an exchange for trading (trading = swapping) and your tokens are not at risk of being stolen by hackers attacking the exchange. When using decentralized exchanges like Uniswap, you don’t need to register/login, you simply connect your Wallet (Hardware Wallets like ledger via Metamask, or software wallets like Trustwallet via WalletConnect) and you are ready to swap or use liquidity pools.

Domains

Uniswap uses two domains, one for information and one for swapping/liquidity pool transactions:

  1. On https://uniswap.info/ you can look up tokens, see available swap pairs, liquidity, volumes, prices etc.

Connect wallets

First, navigate to https://app.uniswap.org/ then, in the top right corner you can click on “Connect to a wallet”. The following options pop-up:

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Software Wallets

If you are using a software wallet that supports WalletConnect (like Trust Wallet, which we have recommended here), you click on “Wallet Connect”, take your mobile app wallet, scan the QR-code, connect and you are ready to use your tokens for swapping or liquidity pools straight away. That’s it!

Hardware Wallets

If you are using a hardware wallet (like Ledger, which we have recommended here), the process is similarly easy but involves one more step. For this, we recommend you use the Brave Browser. In Brave, you visit Uniswap, click on “Connect to a wallet”/“Install Metamask” and follow the instructions. After installing Metamask, in your Brave Browser you go to brave://wallet/ (or via Settings / Crypto Wallets) and click on the round icon in the top right corner to connect your hardware wallet. You are then ready to swap or use your tokens from your hardware wallet.

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After you have connected your wallet on Uniswap, you will be able to see in the top right corner that you are connected, together with your ETH balance.

Swapping (Trading)

Once you are on Uniswap, in the box that appears (below), you have two options. The first one is to “Swap”, the second one is the liquidity “Pool” which we explain below.

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To swap, you simply choose how many ETH you want to swap, and to which token you want to swap. That’s it.

If you cannot find TXL right away, just click here.

More information about available tokens, volumes, liquidity and prices of your desired tokens can be found on Uniswap’s information domain: https://uniswap.info/

Earning swap fees by providing liquidity

The second option in the box is to add liquidity by clicking on “Pool” instead of “Swap”:

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Liquidity Pool as the price calculator

To understand liquidity, you first need to understand how the pricing in Uniswap works: For each currency pair, e.g. TXL/ETH, there is a liquidity pool. The current ratio of TXL and ETH determines the current price:

If people are swapping ETH to TXL, they are paying ETH into the liquidity pool and taking TXL out of the liquidity pool. In this case, the price of TXL increases and the price for ETH decreases. As an example: In the liquidity pool are 3,000,000 TXL worth $0.15 each and 1,000 ETH worth $450 each. That means for 1 ETH you get 3,000 TXL, meaning the ratio is 3,000:1. Now, if someone swaps 10 ETH to TXL, they put 10 ETH into the liquidity pool and take out 30,000 TXL, as this is the current ratio or price, respectively. After the swap, the liquidity pool looks different: We only have 2,970,000 TXL left in the pool, but 1,010 ETH. Dividing TXL by ETH now shows that the ratio is not 3,000:1 anymore, but only 2,941:1. So, with 1 ETH you get less TXL. To get the same amount of TXL, you have to pay more ETH. Or in other words: ETH has decreased relative to TXL. As somebody bought TXL, TXL is now more valuable.

Accordingly, if people are swapping TXL to ETH, the price of TXL decreases relative to ETH.

For the swap, the person swapping needs to pay a swap fee. This trading fee is currently 0.3% of the swap volume and is paid in the currency the person is selling. This trading fee is not paid to the exchange (as would be the case for centralized exchanges) but paid to the people who offered their tokens as liquidity for the liquidity pool.

Liquidity Pool as a means of earning money (swap fees)

When there is no liquidity, there is nothing to trade and no price can be determined. To maximize liquidity and trading opportunities, Uniswap offers everyone the ability to provide liquidity for the liquidity pools. That means that anyone can lend their tokens to a liquidity pool. As an incentive, this person gets all the swap fees that are paid by swapping with the liquidity they provide. This way, there is the potential to earn a lot of $ per day by simply lending liquidity to the pool.

In detail, the lending works like this:

Assuming the current TXL / ETH ratio is 3,000:1. If you want to provide liquidity to the pool, you have to pay in TXL and ETH in exactly this ratio. You could e.g. pay in 3,000 TXL and 1 ETH or 9,000 TXL and 3 ETH or 1,000 TXL and 0.333 ETH. Whatever the amount you pay in, you are entitled to earn the swap fees generated by “your” tokens.

You can withdraw your liquidity at any time but, as soon as you do, you stop earning swap fees. The ratio at which you withdraw from the pool is the current market price. So, if the value of TXL increased while your money was “working” in the liquidity pool, and the ratio TXL/ETH is 2,500:1 when you want to withdraw, then you would get back less TXL (which are worth more now) and more ETH (which are worth less in this case).

Important End Note

Tixl gGmbH will provide some initial TXL/ETH liquidity after TXL is listed on Uniswap on the 9th of September 2020, along with some investors and any hodler who wants to earn money (swap fees) from lending their liquidity to the liquidity pool.

TixlOrg

Tixl.org — Interoperable DeFi Ecosystem. Made in Germany: $TXL.

Thanks to Christian Eichinger

Dr. Maximilian Muelke

Written by

Chief Marketing Officer @Tixl

TixlOrg

TixlOrg

Interoperable DeFi Ecosystem. 0 to minimum network/gas fees, instant transactions & full AML-compliant privacy. Made in Germany: $TXL.

Dr. Maximilian Muelke

Written by

Chief Marketing Officer @Tixl

TixlOrg

TixlOrg

Interoperable DeFi Ecosystem. 0 to minimum network/gas fees, instant transactions & full AML-compliant privacy. Made in Germany: $TXL.

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