How to earn Interest With Uniswap

Uniswap is a completely decentralized exchange for ETH and other tokens that are issued on the Ethereum blockchain, for example Compound’s COMP token.

Uniswap provides two main use cases:

users can provide liquidity for others who want to exchange tokens or they can exchange tokens against each other.

If you provide liquidity, you earn a commission fee of all trades being made by traders. In the following we will take a closer look at the two use cases:

1. Bob wants to provide liquidity for a so-called liquidity pool. First, he has to decide on a specific Ethereum-based token for which he wants to provide liquidity. Bob opts for the COMP token. If Bob now wants to provide COMP tokens worth 100 USD to the COMP liquidity pool, he must also provide ETH to the same amount, i.e. also ETH worth 100 USD. Bob would then have invested 200 USD.

All users who provide liquidity for his pool would then earn 0.3% of the commission fee on every trade that takes place in the ETH-COMP currency pair. How much Bob earns exactly on all commissions in the ETH-COMP pool depends on his share of the total ETH-COMP liquidity pool. Bob can withdraw his liquidity from the pool at any time.

2. Next, Bob would like to swap ETH for DAI. This is very simple: Bob selects the appropriate currency pair and is directly offered the price. With one click Bob exchanges the tokens, paying a commission fee of 0.3%.

He would pay twice the commission fee (0.6%) if he were to exchange DAI for COMP, because Uniswap performs two swaps in the background: first DAI for ETH, and then ETH for COMP.

Now, imagine that Bob accidentally enters 1,000 ETH instead of 1 ETH, and the price for the swap suddenly becomes much more expensive.

To understand why this is the case, we must to take a closer look into Uniswap’s pricing mechanism.