Table of Contents
An Introduction to Uniswap
Uniswap is a decentralized exchange settlement or an automated liquidity protocol constructed on Ethereum. With this, it permits users to trade with a high decentralization level and censorship-resistance and without mediators. Moreover, Uniswap is trending in the DEX world today.
As of February 2021, it secured $3.4 billion within its contracts. This figure stands for around 10% of all value locked in Decentralized Finance (DeFi) applications according to Defi Pulse. Plus, Uniswap also has around 1 billion trading volume every day.
An Ethereum developer, Hayden Adams, built the platform last 2018. Also, Dan Robinson and Noah Zinsmeister are the other two developers who contributed to creating the project. However, Vitalik Buterin, the Ethereum Co-founder, first described the primary technology that inspired its execution.
How Does Uniswap Work?
With Uniswap, you can get ahead of digital exchange’s traditional architecture where there is no order book anymore. It functions with a design known as the Constant Product Market Maker, a modification of the model acknowledged as Automated Market Maker (AMM).
These automated market makers are the brilliant arrangements that keep liquidity reserves or liquidity pools that many traders can bargain against. Also, it is the liquidity providers who fund these reserves.
Remember that any individual can become a liquidity provider who deposits a similar value of two tokens in the pool. In response to it, traders pay a fee to the reserve. Then, it gets distributed to liquidity providers based on their particular share of the pool.
To understand more about how it works and how to navigate, read further below on how you can use Uniswap:
- Go to the Uniswap interface.
- Link your wallet. You may utilize Trust Wallet, MetaMask, or any other wallet supported by Ethereum.
- Choose the token you would like to trade from.
- Select the token you wish to trade to.
- Click on Swap.
- In the pop-up window, preview your transaction.
- Confirm the transaction inquiry in your wallet.
- You have to wait for the transaction to get confirmed on the Ethereum blockchain. You may check its status on https://etherscan.io/.
What Makes Uniswap Different?
Uniswap is known to be more decentralized. It means that it is more versatile than a lot of exchanges for different reasons. To recognize its difference and uniqueness, here are several features that Uniswap offer which you must familiarize yourself with:
You Can Trade Ethereum-based Tokens
This open-source protocol lacks a listing policy and does not charge listing fees. Rather, Uniswap users bet their tokens in liquidity reserves that identify which are on the list.
Additionally, using Uniswap v2, the liquidity providers may merge any pair of ERC-20 tokens into other trading pairs without using ETH itself. Yes, not all possible trading pairs are available. However, Uniswap has impressive coverage where it provides trading pairs over 2000 or more, which exceeds other exchanges.
It Does Not Keep Funds in Custody
It is the smart contracts that control the user funds entirely instead of Uniswap themselves handling it. These smart contracts manage each trading aspect. Uniswap, on the other hand, makes separate agreements to deal with every trading pair. This occurs while periphery contracts assist the system differently.
Anyone Can Become a Liquidity Provider
By betting your token in the Uniswap liquidity pools, you can become an LP (Liquidity Provider) and obtain revenue from the Uniswap fees. Projects may also fund the reserves to kickstart the trading on the Uniswap DEX.
No Centralized Order Book Utilization
One thing about Uniswap is that the platform does not utilize an order book to identify prices. Instead, Uniswap uses formulas according to token ratios in different liquidity pools. Moreover, Uniswap v2 utilizes oracles over a period that averages price data. With this method, there is price manipulation avoidance and produce reliable prices.
Developers Can Expand Uniswap
Many developers started to divide Uniswap and made variations like KingSwap, SushiSwap, and Zuniswap. They also built custom interfaces, namely Uniswapdex.com and Uniswap.ninja, that offer access to Uniswap itself. However, these platforms still have slight variations. Also, exchange aggregators may include Uniswap within their services.
Has Competitive Fees
On every trade, there is a 0.3% fee that DEX charges. The fees are adjoining the industry averages, where almost all other crypto exchanges make you pay up to 0.1%-1% for each trade. You must note that Ethereum’s gas fees might increase trading costs dramatically. However, it may change when the developers solve the problem.
The Uniswap Token
Last September 17, 2020, Uniswap set up the governance token referred to as UNI. They did not operate an ICO and other token sales. Instead, they dispensed the UNI tokens based on a fixed release schedule.
UNI is the original token of the Uniswap protocol where it enables the holders to governance rights. It means that UNI holders may vote for any amendments to the existing protocol. They can even fund liquidity mining pools, partnerships, grants, and many other proposals.
With the protocol already acting as such a public good, the UNI token solidifies this concept. Having one billion UNI tokens coined at development, 60% of those get distributed across current Uniswap community members. The remaining 40% would be available to team members, advisors, and investors for four years.
A portion of the community distribution process occurs via liquidity mining. It means that UNI gets allocated to liquidity providers in the following Uniswap pool or reserves:
Furthermore, investors can purchase the UNI tokens from many various exchanges, including: