Uniswap is an Ethereum-based decentralized exchange where traders can swap ERC20 tokens without having to wait for the buyer or the seller. Uniswap doesn’t list the tokens of other blockchains because it’s built on Ethereum. As the logo suggests, Uniswap works with the help of Unicorns.
What is Uniswap?
Uniswap is an open-source software dedicated to providing services similar to a traditional exchange. The only difference is that it’s not administered by a centralized authority. Using a collection of liquidity pools, Uniswap provides trading opportunities for multiple crypto assets. The platform members can lock their assets to participate in these liquidity pools.
A portion of the trading fee is transferred to these members as a reward for maintaining the liquidity in these pools. The developers can list their tokens on Uniswap if their project is built on Ethereum.
Furthermore, there needs to be a liquidity pool for traders for the token they’re planning to list on the exchange. Unlike traditional exchanges, Uniswap doesn’t have any listing fees.
Uniswap Brief History
Hayden Adams, the founder of Uniswap, released this project in November 2018. Hayden Adams started working on this project following an idea proposed by Vitalik Buterin, co-founder of Ethereum, in 2016. The Ethereum Foundation also funded this project with $100,000.
Uniswap v2 was launched in 2020 allowing users to swap different tokens on Ethereum. Those, who had carried out a transaction on the network before the launch, received 400 UNI tokens airdrop from the protocol. Those, who provided more liquidity to the protocol, received more rewards compared to others.
With its consistent growth, Uniswap has now become the largest decentralized exchange in terms of trading volumes.
What Makes Uniswap Different?
Uniswap isn’t the only decentralized exchange in the crypto world. There are a few others like Sushiswap, PancakeSwap, and more. The unique thing about Uniswap is that it “Constant Product Market Make Model”, a pricing mechanism that accurately defines the value of different tokens.
Uniswap uses a constant equation (x * y = k) to determine the value of a token instead of connecting the buyers and sellers. If a user wants to create a liquidity pool, he/she can add an equivalent amount of ERC20 (they’re willing to add) and ETH tokens. The price is determined based on the number of tokens available in the pool.
For example, if a user has purchased MATIC tokens from the pool, the supply of MATIC will decrease and the price will eventually increase. Whereas the price of ETH tokens will decrease because of increased supply. So, whenever a trade is successfully executed, the price of tokens changes on Uniswap.
It’s easy to list a token on Uniswap if the project is available on Ethereum. The users can easily create a liquidity pool for an ERC-20 token if there isn’t a pool already. Each token has its own smart contract on this platform. Once a pool is created, users can either trade or contribute to the liquidity pool if they want.
How Does Uniswap Work?
Uniswap consists of a set of smart contracts that hold liquidity reserves. The liquidity reserves are maintained with the help of ERC-20 token holders. These token holders deposit an equivalent amount of two tokens in the liquidity pool. The other users can trade these assets based on their needs.
The buyers need to pay a small amount of trading fee when swapping different tokens. 0.3% of this fee is transferred to liquidity providers for their contribution. The tokens deposited to the liquidity pool can either be an ERC-20 token and ETH or two ERC-20 tokens. The system generates the liquidity tokens according to the number of tokens deposited by a liquidity provider.
The users can return these tokens to redeem their funds whenever they want. If there’s a pool of ETH/MATIC, the Uniswap calculates the total liquidity of this pool by multiplying the quantities of these two assets in the pool. The whole project revolves around the concept that the total liquidity needs to be constant.
What are the Use Cases of UNI Token?
UNI is the native token of Uniswap that has a market cap of $6.7 billion with a circulating supply of 689 million tokens. It has a total supply of 1 billion tokens. The remaining 31 million coins will be distributed among investors and community members over the course of 3-4 years.
Trading Fee – The users that swap tokens on Uniswap need to pay a specific amount of UNI tokens as trading fees depending on the size of tokens they’re swapping. 0.3% of the trading fee is transferred to the liquidity providers of that particular pool.
Governance – The UNI token holders also have governance rights. It means they can vote for certain developments for the project. They can even propose new ideas for the platform’s growth.
How to Use Uniswap?
The users need to create an account on Uniswap and connect it to any Ethereum-supported wallet including Trust Wallet and MetaMask. They can then select the names of tokens they want to exchange and press the swap button to confirm the trade. They can then visit their wallet to confirm the transaction.
It may take some time to complete the trade depending on the status of the Ethereum blockchain because transaction needs to be updated on the blockchain.
Conclusion
Uniswap is a leading decentralized exchange in terms of trading volumes. It offers a trading facility for tokens that are published on the Ethereum blockchain. It also provides earning opportunities for those who contribute to the liquidity pools. We’ve shared essential information about the Uniswap protocol. If there’s still a question about this open-source protocol, feel free to leave a comment.