Coinbase vs. Uniswap — Which Exchange Is Better? (2024)

The debate about whether decentralized exchanges are better than centralized exchanges has been raging in the crypto world for years now.

In theory and in spirit, most cryptocurrency users probably side with decentralized exchanges considering that cryptocurrency is, well, decentralized.

The ethos to decentralize everything means getting away from platforms like Coinbase instead of moving toward them. However, in practice, centralized exchanges still offer a smoother, faster, and more reliable trading experience.

Hold on a second — is that still true? The rise and evolution of Uniswap, a powerful decentralized exchange running on Ethereum, has us wondering if the age of the DEX begins now.

So, which is better in the Coinbase versus Uniswap exchange matchup? Let's take a look at each exchange's offerings, along with a couple interesting asides for your education.

Centralized versus decentralized exchanges — what's the big deal?

Simply put, a centralized exchange forces you to rely on an intermediary for trading and storing crypto assets. In contrast, a decentralized exchange lets peers using self-hosted crypto wallets anonymously connect and trade cryptocurrencies.

Core to the belief that decentralized exchanges are better than centralized ones is the latter’s penchant for being hacked. You see, centralized exchanges custody cryptocurrencies in what are known as hot wallets. A hot wallet keeps crypto loaded up for ease of access, which means such wallets are network-connected and oh so hackable.

If you need examples of such hacks, look no further than the infamous $500M+ losses racked up during the attacks on Mt. Gox and Coincheck.

Decentralized exchanges solve the security issues dogging crypto trading by enabling p2p trading between self-custody crypto wallets. Self-custody simply refers to the fact that it's you, not an exchange or third party, who stores your crypto.

There have been numerous attempts at the DEX format since 2014, but none really stuck until EtherDelta came along. While EtherDelta had a variety of problems stemming from the exchange's off-chain architecture, it contributed self-custody to trading. The exchange's shoddy performance was the source of many complaints — but looking back, EtherDelta set the scene for significant advancements in the space.

After EtherDelta, decentralized exchange architecture further branched in two directions — on-chain and off-chain. The latter resulted in the development of protocols like 0x, while the former gave us the AMM (automated money maker) format utilized by Bancor, and eventually, Uniswap.

In fact, the on-chain AMM format is the basis for nearly all the innovation found in decentralized finance protocols like Compound, Aave, and Curve.

Uniswap is a decentralized protocol making it possible for you, along with everyone else in the world, to swap tokens directly from your self-hosted crypto wallet. You don't need to give up privacy data or private keys to use Uniswap — just plug in your MetaMask and you're good to go.

With Uniswap, there is no intermediary. It's just you, your peers, and smart contracts running the show. There are two main functions of the Uniswap protocol.

1. Trade ERC-20 tokens

2. Earn trading fees by providing liquidity to the protocol

So, on the one hand, you can trade just like you're used to on other exchanges, while on the other hand, you can profit by providing token liquidity.

Uniswap gets a lot of shoutouts for being a decentralized exchange. However, if we're really splitting hairs, it's fair to specify it isn't precisely a decentralized exchange.

Instead, the proper term for what Uniswap is is an automated liquidity protocol. An automated liquidity protocol means Uniswap facilitates liquidity between traders, but doesn't store liquidity or operate an order book.

Instead, Uniswap allows parties to create liquidity pools by depositing tokens into Ethereum-based smart contracts. These liquidity pools form the basis for token swaps.

If you're having a hard time imagining what this all means, here's an example.

1. Let's say you've just created an ERC-20 token. To give it value and let others trade for it, your new token will need a pairing with a liquid medium of exchange token like ETH.

2. So, you use Uniswap to create a liquidity pool between your token and ETH by depositing X and Y amount of each token.

3. Since you're the only one with your token, pairing it with ETH in a Uniswap liquidity pool gives anyone who has ETH a common ground for buying your token.

4. People access your money market via Uniswap and trade ETH between their wallets and the smart-contract held liquidity pool. As more wallets gain exposure to your cryptocurrency, swaps start going in the other direction as people trade back to ETH.

Now, if you're just a good old fashioned altcoin trader and want to load your bags with the latest coin, using Uniswap is super simple.

1. Head over to uniswap.org, fire up the web-app

2. Connect your MetaMask wallet (make sure to have ETH for gas fees)

3. Find the token you want to trade from the drop-down or enter the contract address

4. Fill in the amount you're buying, then trade with the liquidity pool from your MetaMask wallet

The entire process takes mere minutes and is quite intuitive, thanks to excellent UI design. About the only difficulty you might run into is getting your trade to take when there's high trading volume on your selected token. Remedy this by increasing slippage tolerance settings.

Why would you use Uniswap instead of Coinbase? There are a number of obvious upfront advantages.

• Privacy — Coinbase makes you share KYC (know your customer) data. Name, address, birthdate — all the good stuff. Uniswap doesn't require any data except your wallet address.

• Security — Sure, Coinbase wallets are FDIC insured. While that's nice and all, nothing beats storing your own crypto & trading from your own wallet using a DEX like Uniswap.

• Token listings — Coinbase is notoriously slow to add tokens to their exchange. For reference, Coinbase just listed DNT, but DNT is already several years old. Uniswap listings are instant in comparison since all that's required is the creation of a liquidity pool.

• Cheap fees — Trading fees are the bread and butter of centralized exchanges like Coinbase. Coinbase charges 0.5% fees for trades up to $10K. They'll also charge you the gas used for Ethereum transfers when the going gets tough. In contrast, Uniswap charges 0.3% regardless of the amount traded.

• Self-custody — Have you heard the crypto adage not your keys, not your wallet? It means unless you own the private keys to your wallet, it isn't yours. Coinbase wallets are custodied by the exchange. At any time, access to your wallet and the funds within can be blocked or withheld. Uniswap doesn't custody your crypto — it leaves that to you, meaning you always retain ownership of your crypto assets.

Not everything about Uniswap is roses and unicorns. Like anything else, Uniswap has its own downsides.

• Unpredictable gas fees — One of the downsides to using Uniswap is paying gas fees. Uniswap runs on the Ethereum network. Sometimes, Ethereum gets congested, especially when there's a lot of Uniswap activity happening. This leads to high gas fees — sometimes $30 per transaction or more. However, when Ethereum gets congested, Coinbase will charge you for gas fees too. When it comes to gas, Uniswap and Coinbase are a wash.

• Running up expenses with failed tx's — When Uniswap is particularly busy, it's pretty easy to get your transaction rejected by using low gas. Even on recommended gas settings, Uniswap has a habit of rejecting all but the highest GWEI ranges during high trading volume hours. Even if your transaction fails, you still lose the gas. Since Coinbase uses custodied assets and an order book for trading, you don't have to worry about failed transactions.

• Rug-pulls — The rug pull is a very recent phenomenon referring to the abundant scam tokens circulating on Uniswap. Because Uniswap isn't regulated, anyone can add liquidity and enable trading for an ERC-20 token. The scary part is that a lot of these tokens are scam projects that appear one day, and are gone the next. Coinbase does thorough due diligence on all assets added to their platform, meaning you can trade cryptocurrencies with absolute confidence.

Decentralized exchanges have come a very long way from the EtherDelta days. Uniswap is nearly as simple as Square Cash App for trading altcoins and earning fees on deposited assets.

When should you use Uniswap instead of Coinbase?

• You want to trade with privacy and not identify yourself

• Getting altcoins as soon as they hit the market is important to you

• You value the security of self-custodial wallets

• You want to save money on trading fees

• You like supporting cutting edge crypto tech and want to try DeFi

When should you use Coinbase instead of Uniswap?

• You want to buy crypto with cash

• You want to sell crypto for cash

• Having an FDIC insured wallet is important to you

• For tax purposes, you want an easy to export trade history

• You prefer the exchange to perform asset due diligence for you

• Having a mobile app to trade crypto is important to you

Unlike Coinbase, Uniswap is not regulated by government agencies. How does that play into the legality of Uniswap trades?

Is using Uniswap legal?

Using Uniswap is legal insofar as there is no specific legislation against it. However, the law surrounding Uniswap is murky, just as it is for most unregulated cryptocurrency tools. As such, keep track of your Uniswap trades if you're required to account for them in your country.

Are Uniswap trades taxable events?

Trades made using Uniswap are taxable events similar to trades made using Coinbase. Unlike Coinbase, Uniswap doesn't make it easy to export your trade history for accounting purposes. Use a portfolio tracker to keep up with your Uniswap trades and simplify things come tax day.

Who operates the Uniswap exchange?

Uniswap is an Ethereum-based protocol for creating liquidity between ERC-20 tokens. Anyone can integrate the Uniswap protocol or use it as the basis for a new protocol. So, the short answer is users interacting with smart contracts operate Uniswap, which is why the exchange is decentralized.

Is trading on Uniswap safe?

Uniswap is a decentralized exchange enabling trading between self-custodied wallets. Since the exchange lacks an order book and doesn't hold assets, it is remarkably secure compared to traditional exchanges.

The biggest risk when trading on Uniswap is falling for scam projects or buying scam tokens. A scam token is usually a token masquerading as one belonging to a legitimate project. To avoid buying such tokens, always check the token's contract address to verify its legitimacy before trading.

Is Uniswap truly decentralized?

Uniswap is an open-source protocol running on Ethereum, itself a decentralized blockchain network. With Ethereum due to swap over to PoS consensus with the launch of ETH 2.0, Uniswap is, technically speaking, primed to become even more decentralized.

Who created Uniswap?

In 2018, Hayden Adams created and launched Uniswap on the Ethereum mainnet. After meeting Ethereum founder Vitalik Buterin and showing off Uniswap's code, Buterin suggested he re-write Uniswap using Vyper before applying for an ETH foundation grant.

However, it was Alan Lu, a researcher with Gnosis, who first conceived of the market maker used by Uniswap today.

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