Two easy ways to lose money on Uniswap
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1️⃣ Buying the wrong token
Centralized exchanges curate which tokens they allow to trade. Some, like Coinbase or Kraken, have short, restrictive lists. Some, like Binance, greenlight a vast number of tokens. But none of them allow what you can encounter on Uniswap - fraudulent tokens pretending to be something else. Let‘s say you want to buy some XFIT, a recently launched token. You go to Uniswap, click on „Charts“ and search for XFIT. This is what you get - three tokens, one legit and two fakes.
And this is still not the worst that can happen. Even before the launch of a hot new token you will find multiple fake copies of it on Uniswap, at „attractive“ prices. Multiple people fall for this, buying worthless coins which they can never sell. If you don‘t want to be one of the victims, here are some simple measures you can take.
Firstly, you need to check the proper token symbol. It is an abbreviation of the name of the token, used as a symbol during trading - e.g. BTC for Bitcoin. Finding the symbol is not always trivial - e.g. the XFIT token is issued by a company branded XFAI. If you want to buy XFIT but look for XFAI, you might well be scammed.
The token symbol should be listed on the official website of the project, which issues the token. You can find the website e.g. via Twitter. Twitter is a great place to start because it has verified accounts so you can be sure you are not being scammed.
If you want to buy a token, press „Select a token“ and a new window will appear. It will allow you to choose tokens from a predefined list. You will see a default list plus tokens you have added to it earlier.
You can type the token symbol and see if Uniswap comes up with a suggestion. The suggestions on Uniswap are legitimate, as they come from lists vetted by trustworthy partners. Typing "xfit" does indeed produce a result.
When you click on „Import“ you will be able to add the token to your list and proceed with the purchase, after a security warning from Uniswap.
This method works fine on Uniswap, but there is an even better one, which works on every decentralized exchange - finding the correct token address. The address is a unique identifier of the smart contract behind the token on its network. Each address is unique so when you find the correct one you cannot go wrong with your purchase from a legitimate exchange.
Finding the address is easy, as there are two good sources - CoinGecko and CoinMarketCap. Go to one of these websites and enter the symbol of the token you are looking for in the search window. If the token is available for purchase at all, you should find its address on at least one of both. In our example, while currently CoinMarketCap does not show the address for XFIT, we can find it on CoinGecko:
There you can see the contract address and a copy button right next to it. Click it to copy the contract address. Now you can return to Uniswap and paste it in the window you‘ve seen earlier. Using the address Uniswap will find the correct token. This method can be used on any legitimate decentralized exchange.
2️⃣ Setting excessive price slippage
So you have the correct token and want to buy it. You do the purchase and afterwards see you‘ve bought less than you hoped for, e.g. 10% less. What could have went wrong? The usual culprit is your price slippage setting, which allowed front-running bots to take a cut out of your money. The price slippage setting can be found by pressing the „Settings“ button in the swap box on the main Uniswap screen.
The default setting is 0,5%. Decentralized exchange transactions impact the price of the asset your are trading - if you buy, e.g. XFIT, the price of it will go up. If you sell it, the price goes down. For very liquid assets - the biggest cryptocurrencies on the biggest exchanges - price impact is really negligible. For less liquid assets it can considerable. The price slippage setting defines how much price impact you tolerate. The default 0,5% setting means you are ok with getting 0,5% less of the token you are buying then what its listed price suggests.
The default works well for most transactions, you can even usually lower it to 0,1%. However every now and then you want to buy a less liquid token. In such a case the 0,5% default setting might not be enough, as your transaction will have a bigger price impact. Thus you change the setting - and what you should do right after your transaction is change it back again.
What happens when you leave your slippage tolerance at e.g. 5%? This means during every subsequent transaction you make you are telling the world „even though there is a lot of XFIT costing $0.3, I am happy to pay 5% more for it, i.e. $0,315“. Because transactions are public, there are bots which are looking exactly for this information. When your new transaction is pending, they may try to frontrun you if the profit is big enough. Let‘s say you are buying XFIT with a slippage of 5%. The bot will quickly buy XFIT before you, and then sell it back, once your transaction has driven up the price.
The bot‘s transaction will drive the price up for you, meaning the bot‘s gain is your loss. While such losses may appear trivial, they pile up. If you buy less popular currencies on Uniswap, your transaction might consist of several seperate sub-transactions multiplying your loss. The solution is simple - if you ever increase the slippage tolerance setting, always change it back right away. The same applies to any other exchange, e.g. 1Inch. There is no good reason not to.