Introduction
Decentralized finance (DeFi) is rapidly transforming the financial landscape by offering open, permissionless, and global alternatives to every financial service currently available in the traditional banking system - savings, loans, trading, insurance, and more. At the core of many DeFi applications are Automated Market Makers (AMM) such as Ubeswap, which is native to the Celo blockchain ecosystem.
This tutorial aims to provide a deep, comprehensive dive into Ubeswap’s core workings, along with hands-on coding examples, empowering developers to understand, interact with, and build on top of this pioneering DeFi protocol.
Prerequisites
Before we get started, there are some fundamental concepts and skills you should be familiar with:
- Blockchain Basics
- Celo’s Architecture
- Solidity Programming
- Web3 Development
- Automated Market Makers (AMMs)
Requirements
Here are the necessary tools and libraries you need to follow along with this tutorial:
-
Node.js and npm: Node.js is a JavaScript runtime built on Chrome’s V8 JavaScript engine, and npm is a package manager for Node.js. Make sure you have Node.js and npm installed — you can download them here.
-
Text Editor: You will need a text editor to write and manage your code. Visual Studio Code is highly recommended as it has good support for JavaScript and Solidity syntax.
-
ContractKit: ContractKit is a library developed by cLabs to simplify the process of building dApps on the Celo platform. It provides users with the tools to interact with the Celo Blockchain and the Celo Core Contracts. Install ContractKit in your project using npm:
npm install @celo/contractkit.
Tutorial Steps
1. Setting Up the Development Environment
Having the right setup is critical for efficient development and debugging. Let’s start by setting up our development environment:
$ mkdir celo-ubeswap-tutorial
$ cd celo-ubeswap-tutorial
$ npm init -y
$ npm install @celo/contractkit web3
The above commands create a new directory for our project, initialize a new Node.js project, and install the necessary libraries — ContractKit and Web3.js.
2. Configuring ContractKit
To interact with the Celo network, we need to configure ContractKit. Let’s create a connection to Alfajores, which is a test network (testnet) for Celo:
const Web3 = require('web3');
const { newKitFromWeb3 } = require('@celo/contractkit');
const
web3 = new Web3('https://alfajores-forno.celo-testnet.org'); // Connect to Celo's Alfajores Testnet
const kit = newKitFromWeb3(web3);
// Configure your account (replace with your private key)
const accountPrivateKey = 'YOUR_PRIVATE_KEY';
const account = web3.eth.accounts.privateKeyToAccount(accountPrivateKey);
kit.connection.addAccount(account.privateKey);
The above code creates a new Web3 instance and uses it to instantiate a new ContractKit. It then converts your private key into an account and adds the account to the ContractKit instance. Remember to replace 'YOUR_PRIVATE_KEY' with your actual private key.
3. Interacting with Ubeswap’s Smart Contracts
At the core of Ubeswap (and indeed all AMMs) are smart contracts. Smart contracts are autonomous programs that once deployed, carry out their functions automatically when certain conditions are met. Understanding these contracts and how to interact with them is key to mastering Ubeswap.
In the case of Ubeswap, the three core smart contracts we need to understand are the Factory Contract, the Exchange Contract, and the Router Contract:
-
Factory Contract: This contract is the birthplace of all subsequent Exchange Contracts. It creates a new Exchange Contract for every unique pair of tokens for which liquidity is provided on Ubeswap.
-
Exchange Contract: Each Exchange Contract represents a liquidity pool for a specific pair of tokens. It holds the reserves of both tokens and maintains the invariant (x*y=k) that allows for price determination and liquidity provision. This is where all the action happens: token swaps, liquidity provision, and liquidity removal all interact with this contract.
-
Router Contract: The Router Contract serves as a facilitator that simplifies interaction with Exchange Contracts. It abstracts away the complexity of dealing with individual Exchange Contracts by providing a standard interface to carry out various operations like adding or removing liquidity, swapping tokens, and more.
The Router Contract is the contract we will be primarily interacting with, as it provides high-level methods that combine multiple low-level operations into a single transaction, thereby simplifying our interaction with Ubeswap.
4. Creating and Funding Liquidity Pools on Ubeswap
Now that we’ve set up our environment and understood the key concepts, let’s dive into the code. We will start by creating a new liquidity pool. As a reminder, a liquidity pool is a pair of tokens with reserves that users can trade against.
Creating a liquidity pool involves providing an initial deposit of both tokens. This deposit forms the initial liquidity of the pool. In return, the provider gets a special type of token known as a Liquidity Provider (LP) token. LP tokens represent a user’s share of the pool and can be used to reclaim their share of the reserves.
Here’s how you can create a new liquidity pool:
const router = await kit._web3Contracts.getUniswapRouter(); // Get Router Contract
const twentyMinutesFromNow = Math.floor(Date.now() / 1000) + 60 * 20; // Expiration time
const tx = await router.methods
.addLiquidity(
tokenA._address,
tokenB._address,
tokenA_amount,
tokenB_amount,
tokenA_minAmount,
tokenB_minAmount,
account.address,
twentyMinutesFromNow
)
.send({ from: account.address });
console.log(`Transaction hash: ${tx.transactionHash}`);
In this code snippet, we’re calling the addLiquidity function of the router contract. We pass the addresses of the two tokens we wish to provide as liquidity, the amounts of each token we are deposit
ing, the minimum amounts of each token that we are willing to deposit, and a timestamp indicating the latest time the transaction can be mined.
5. Executing Token Swaps Using Ubeswap’s AMM Protocol
After providing liquidity, the pool is now ready to facilitate trades between the two tokens. A user can trade their Token A for Token B, and vice versa, directly on-chain.
Swapping tokens involves specifying the input token (the token you are giving) and the output token (the token you wish to receive). The contract calculates the amount of output tokens you receive for your input tokens based on the relative reserves of each token in the pool. If the trade is acceptable to you, you can execute it directly on-chain.
Here’s how you can swap tokens:
const tx = await router.methods
.swapExactTokensForTokens(
tokenInAmount,
tokenOutMinAmount,
[tokenInAddress, tokenOutAddress],
account.address,
twentyMinutesFromNow
)
.send({ from: account.address });
console.log(`Transaction hash: ${tx.transactionHash}`);
In this code, the swapExactTokensForTokens function is called on the router contract. This function allows a user to swap an exact amount of input tokens for as many output tokens as possible, accounting for fees and slippage.
6. Fetching and Analyzing Transaction Data
Analyzing transaction data provides us with key insights into the operation of Ubeswap and how much it costs to interact with it. We can fetch this data directly from the blockchain using web3.
const transaction = await web3.eth.getTransaction(tx.transactionHash);
console.log(transaction);
The above code fetches the transaction data from the blockchain using its hash. The data contains useful information like the transaction’s gas cost and the actual number of output tokens received, which can be compared to the expected amount to compute the slippage for the trade.
7. Understanding Ubeswap’s Pricing Mechanism
The pricing of tokens in an AMM like Ubeswap is driven by a formula known as the “Constant Product Formula” represented mathematically as x*y=k, where x and y are the reserve balances of the two tokens in the pool, and k is a constant. This formula is used to maintain the pool’s balance as trades are executed, impacting the token prices.
Whenever a trade is executed, the reserves of the pool change, leading to a change in the price of the tokens. For instance, when a user trades Token A for Token B, the reserve of Token A increases, and the reserve of Token B decreases, leading to a change in the relative prices of the two tokens. The more significant the trade relative to the size of the reserves, the more the price change, leading to higher slippage.
What’s Next?
With a deep understanding of Ubeswap and its workings, you are well-equipped to integrate it into your applications. You can create DeFi applications that allow users to trade tokens, add or remove liquidity to pools, and much more.
Consider extending your knowledge by exploring other DeFi protocols built on Celo, like Moola, a lending platform, or Sushiswap, another AMM. Understanding how these protocols differ from Ubeswap will broaden your knowledge of the DeFi ecosystem on Celo and open up new possibilities for what you can build.
Conclusion
In this tutorial, we’ve taken a deep dive into Ubeswap and its operations on the Celo network. We’ve covered the core principles behind automated market makers and provided hands-on coding examples for interacting with Ubeswap’s smart contracts, providing liquidity, swapping tokens, and fetching transaction data.
With this knowledge, you are well-equipped to start building sophisticated DeFi applications on Celo that leverage the power of Ubeswap. The decentralized financial revolution is just getting started, and you are now well-equipped to be a part of it!
About the Author
Elijah Sorinola Web3 technical writer with a passion for communicating complex technical concepts in a clear and concise manner. Let’s connect on LinkedIn to discuss your content needs.
