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What is QuickSwap?
QuickSwap is a layer-2 decentralized application built on the Polygon blockchain allowing users to swap ERC-20 tokens. Decentralized exchanges (DEXs) are blockchain-based applications that form the fundamental cornerstones of the growing suite of decentralized finance (DeFi) tools.
The QuickSwap DEX uses an automated market maker (AMM) model for users to swap tokens. It was founded by Sameep Singhania in 2020 as a layer-2 DEX on the Polygon network. It fosters the decentralization ethos by ensuring trustless, permissionless and censorship-resistant cryptocurrency trading.
It functions as an automated DeFi liquidity protocol where users add token pairs to the liquidity pool and earn transaction fees from those who use the pool for swapping tokens. Users can seamlessly exchange any combination of ERC-20 tokens without an order book. As long as there is a liquidity pool for it, users can trade any pair via QuickSwap.
By supplying a token pair, anyone can launch a new liquidity pool and begin collecting transaction fees from other participants. This makes QuickSwap permissionless; anyone can launch a new pool without requiring permission.
QuickSwap is similar to Uniswap, the originator of AMMs, and provides the same functionality with similar liquidity protocols but a small cosmetic change: It is built on a layer-2 scaling solution (Polygon) unlike Uniswap, which is built on an layer 1, the Ethereum blockchain.
QUICK (ERC-20 token) is the native cryptocurrency of QuickSwap.It has two use cases: governance and staking. QuickSwap’s governance model grants QUICK tokenholders the power to propose changes to the protocol and cast votes on numerous issues affecting how it functions.
Related: DeFi 2.0: A beginner’s guide to the second generation of DeFi protocols
QuickSwap vs. Uniswap
QuickSwap is a fork of Uniswap since it uses the same liquidity pool model. It has emerged as a quick, affordable and Ethereum-compatible alternative to Uniswap. The difference lies in the fact that QuickSwap is built on Polygon, while UniSwap is on Ethereum.
This allows QuickSwap users to enjoy the security benefit of Uniswap’s audited code while also gaining from the high-speed transactions and near-zero gas fees offered by the Polygon Network.
How does QuickSwap work?
QuickSwap uses an AMM model to provide token pools for users to swap, stake and supply liquidity for token assets.
The following key features of QuickSwap make up its DEX infrastructure:
Liquidity pools
Liquidity pools are a collection of digital assets that enable trading on a DEX. They are a crucial component in DeFi since they supply the much-needed liquidity required for traders to operate on DEXs.
To create liquidity pools on QuickSwap, users lock their cryptocurrency into the protocol’s smart contracts, enabling others to use the locked assets. Consider it akin to a publicly accessible cryptocurrency reservoir. Those who fund this reservoir — aka liquidity providers — receive a portion of the transaction costs for each user interaction in exchange for supplying liquidity.
On QuickSwap, liquidity providers receive 0.25% of the trade fees proportional to their share of the pool.
Another interesting feature of QuickSwap is the change from the order book trade method. Traditionally, exchanges used order books for swap trades. Order books are a real-time collection of buy and sell orders where buyers decide the price that they are willing to pay, place their order price, and then wait for their order to be fulfilled. When a seller matches that price, the order is executed.
This order book method often creates a sub-optimal user experience with sometimes long wait times, low liquidity or lack of order execution, reliance on a third party to help fulfill orders, and higher chances of scams and hacks.
QuickSwap automates this through smart contracts allowing users to swap ERC-20 tokens. When a user wants to exchange one token with another, they send their chosen tokens to the QuickSwap smart contract. The smart contract then calculates the amount of the second token that the user will receive based on the current market price without relying on third-party buy/sell requests for the token being traded. The price determination is done by QuickSwap’s AMM model.
Automated market maker
The QuickSwap AMM model determines the asset prices and provides instant liquidity. It essentially democratizes access to liquidity through its algorithmic code. The QuickSwap AMM is like a financial robot or code that can propose a price between two assets. Instead of the traditional order book, it uses the assets in the liquidity pool to determine the price based on the percentage of tokens in the pool at that time.
This process is programmatic, allowing rapid access to liquidity since the algorithm can always quote a price for a user. With this approach, a transaction can be completed without waiting for the other side to show up. As long as there is sufficient liquidity in the specific pool, trades can be executed.
The formula for calculating each token’s price is x*y=k, where “x” represents the financial quantity of Token A and “y” represents the financial quantity of Token B, with “k” being a constant value. QuickSwap uses an AMM called constant product market maker where “x” and “y” multiply to create “k,” which cannot change in value.
For example, Alice wants to trade Dai (DAI) for Ether (ETH) using the QuickSwap DAI-ETH pool. She added her Dai tokens to the pool for ETH. This increases the ratio of Dai in the pool, resulting in a rise in the price of ETH. But why? Because there is now less ETH in the pool after the transaction, and as per QuickSwap’s AMM formula above, the total pool liquidity (k) must remain constant. To maintain “k,” ETH’s price will rise.
This mechanism is what determines the pricing. So, the more Dai Alice puts in, the less ETH she gets in return because the price of ETH increases. Ultimately, the price paid for this ETH is based on how much a given trade shifts the ratio between the token pool.
Token swapping
Without the need for a crypto-to-fiat exchange, cryptocurrency swapping enables users to instantaneously exchange one cryptocurrency for another. While saving time and money are clear advantages, they are by no means the only reasons users swap.
Sometimes, traders exchange tokens in an effort to profit from a market movement they anticipate. Other times, swaps are occasionally required to pay transaction fees that can only be paid in a particular blockchain’s native coin. As a result, a user of The Sandbox (SAND) may need to make a swap for ETH or Polygon (MATIC) to access the Polygon network.
QuickSwap charges a small transaction fee of 0.3% for every trade that takes place on the platform and near-zero gas fees. The liquidity providers receive payments from the swap-generated fees.
Impermanent loss
Impermanent loss is a possible risk faced by liquidity providers of AMMs like QuickSwap, Uniswap and other such DeFi platforms. Impermanent loss happens when a liquidity provider provides tokens to a liquidity pool, and the price of the deposited token changes compared to when they deposited them.
Liquidity providers are required to place both assets of the trading pair into a liquidity pool. For instance, in an ETH-DAI pool, when trades lower the amount of ETH in the pool and its price rises, the liquidity provider suffers an impermanent loss, as they now hold less ETH since its value went up.
The loss is called impermanent, as the price of ETH may move back up to the original deposited value, and trading fees received may even outstrip the loss. Therefore, it is not permanent. However, it is a risk to be considered.
How to use QuickSwap to swap tokens
They allow cryptocurrency traders to trade without banks, brokers or any other intermediary. QuickSwap is a DEX on the Polygon network that offers swapping, liquidity, yield farming and much more.
The following steps explain how to swap tokens on QuickSwap.
Steps for using QuickSwap to swap tokens
Step 1: Open QuickSwap
Open QuickSwap in a browser and connect with a Polygon-supported wallet, such as MetaMask. Ensure you have some MATIC in your wallet to facilitate the transaction.
Step 2: Click the “Swap” tab in the navigation bar
Open the “Swap” tab and select the token pair to swap.
MATIC shows as the default token, but you can input any ERC-20 token instead. Input the token to swap from and the token to receive.
Step 3: Click on the “Swap” button
Click the “Swap” button and execute the swap. Preview and confirm the transaction by signing the wallet.
The future of decentralized exchanges
DEXs have been gaining popularity in recent years, thanks to the growing interest in DeFi. DEXs allow users to trade cryptocurrencies without the need for intermediaries or centralized exchanges, providing greater security, transparency, and control over assets. As the DeFi ecosystem continues to grow, the future of decentralized exchanges looks promising.
The growth of cross-chain interoperability is one trend that will probably continue. The majority of DEXs currently run on a single blockchain, but the ability to trade assets between chains is becoming more popular. This would increase liquidity and give users access to a greater variety of assets.
Decentralized exchanges are increasingly being integrated with other DeFi applications like loan protocols, yield farming platforms, and prediction markets. Users will be able to transfer assets between applications with ease in a more smooth and connected DeFi ecosystem as a result.
DEXs such as QuickSwap offer significant benefits for trading cryptocurrencies. As they enhance their functionalities, they see an uptrend in users, assets, total locked value and liquidity. Additionally, blockchain-based smart contract initiatives enable these users to function on DEXs with complete anonymity in a trustless financial environment.
Regulatory hurdles remain since different regulations for DEXs apply to jurisdictions across the world. Regulators will probably look more closely at DEXs and other decentralized apps as the DeFi ecosystem develops. Nevertheless, since these platforms operate in a decentralized and borderless setting, it is unclear how regulators will control them.
Another area where DEXs may be improved is user experience. In comparison to centralized options, many users perceive decentralized exchanges to be complex and challenging to use. Yet, creating user-friendly interfaces and integrating DEXs with existing DeFi programmes may make DEXs more approachable to a larger audience.