Uniswap is the largest decentralized crypto exchange protocol built on top of the Ethereum blockchain. It allows users to swap ERC20 tokens.
Unlike most other decentralized crypto exchanges like Coinbase and Binance that are governed centrally by the company that operates the exchange, Uniswap facilitates trades through liquidity pools without the need for middlemen or central administration.
The Uniswap platform was developed by Hayden Adam, a Siemens former engineer. It aims to solve problems that centralized crypto exchanges face, including liquidity challenges, risk of hacking, mismanagement, and arbitrary fees.
Its Mainnet version was released in November 2018, with V2 and UNI, the exchange’s native governance token, launching later in September 2020.
Uniswaps V3 launched in May 2021 with additional features like concentrated liquidity, multiple fee tiers, oracle integration, and cheaper gas fees.
Data from September 11, 2021, shows that Uniswap has a live market cap of over $14 billion with 24-hour trading volume coming in at around $367 million.
How Does Uniswap work?
The Uniswap crypto exchange is an automated market maker (AAM) that uses a new trading model called the automated liquidity protocol.
This protocol is powered by two smart contracts namely the Factory contract and the Exchange contract. These are self-executing computer algorithms that facilitate trades on the platform without the need for middlemen.
The Factory contract adds new tokens and creates liquidity pools for each token, while the Exchange contract swaps facilitate the swapping of tokens in a liquidity pool.
Since Uniswaps runs on the Ethereum blockchain, only ERC-20-based tokens can be added and swapped on the platform.
Automated Liquidity Pools
One downside of centralized exchanges like Coinbase and Binance is that they use an order book system to facilitate trades. In this system, sell orders must be matched with buy orders on the other side of the book to execute trades.
That means users can only sell or buy successfully if an opposite trader is willing to swap the exact amount of tokens. That creates liquidity problems because if the system can’t match you to another trader willing to buy equal or higher amounts of crypto assets at the current price, you won’t be able to fill the trade.
Uniswaps solves the liquidity problem through an automated liquidity protocol. Instead of matching buy and sell orders, it uses liquidity pools built into each token’s smart contract. Anyone trading on the exchange can become a liquidity provider (LP) by contributing their crypto assets into the liquidity pool.
Once users pool their money together, the funds are used to fill trades taking place on the platform. If someone initiates a trade in a certain pool and there is enough liquidity, the trade executes immediately at predetermined prices. Thus, the need to wait for opposite parties to appear to swap coins is eliminated.
To incentivize users to contribute their crypto assets to the pool, liquidity providers receive a token of the total staked funds in a particular pool, which can be redeemed for a share of the gas fees.
Let’s say a user contributes $100 to a liquid pool worth $1000 in total. You receive a 10% stake in that pool. If you want to exit the pool later, you’ll receive 10% of the trading fees.
Determining Token Prices
Another distinctive feature of Uniswap is how the exchange determines token prices.
Unlike the order book system where token prices are determined by the highest seller and the lowest buyer, Uniswap uses an automated market maker protocol to determine prices.
The automated market maker system uses a mathematical equation to adjust the price of a crypto asset depending on its current supply and demand. Thus, prices are increased or decreased based on the ratio of each token in the pool.
For this to work, each liquidity pool contains a pair of ERC-20 tokens.
To start and maintain a liquidity pool, liquidity providers must add equal amounts of each ERC-20 token into the pool. The mathematical equation x*y=K is then used to adjust prices accordingly as traders swap tokens in the pool.
Let’s say a user wants to trade Bitcoin (BTC) for Ether (ETH) via Uniswap’s BTC/ETH pool. The trader will be putting more BTC in the pool to get ETH. As a result, the number of Bitcoins in the pool increases, while that of ETH decreases.
That means the demand for ETH coins in the pool is higher than BTC. Thus, the price of ETH in the pool increases while the price of BTC decreases.
Arbitrage Trading
Arbitrage trading is part and parcel of the Uniswap exchange protocol. These are specialized traders that secure profits by taking advantage of price discrepancies across multiple exchanges.
When a large trade occurs in a pool, it can drive a token price in that pool above its average price on other exchanges, or significantly lower the price of the other token below the market average. That creates a major imbalance in the pool.
That’s where arbitrage traders come in. To keep Uniswap token prices in line with the rest of the market, arbitrage traders buy or sell tokens that are trading below or above their market prices in a pool until the token price rebalances in line with the average price in other exchanges.
For instance, let’s say the automated market maker system adjusts the price of Ether to $37,450 in the BTC/ETH pool on the Uniswap exchange when Ether is trading at $33,000 on Binance.
The traders will buy Ether on Uniswap and sell it on Binance until the price comes down to $33,000 or aligns with ETH price on other exchanges.
How is Uniswap Unique?
Most centralized crypto exchanges require platform users to create an account to facilitate trades and surrender their private keys so that trade orders can be recorded in an internal database.
That exposes users to more risks because they can lose their crypto assets if the exchange is hacked. It’s also time-consuming and expensive.
Again, centralized exchanges are profit-driven and charge exorbitant fees to allow users to list new tokens.
Things are different with Uniswap. Trade orders are executed on the blockchain without the need for a central database, middlemen, or central administrator.
Thus, users maintain control of their funds and don’t have to give out their private keys to log trades. This makes for cheaper, faster trades and lessens the risk of assets loss if the exchange is hacked.
Uniswap is also fully open source. Anyone can copy the code to build their own dapps and list tokens of the exchange without paying any listing fees.
What’s UNI?
Created in September 2018, UNI is Uniswap’s governance token. UNI holders can vote on Uniswap governance proposals like changes to the platform, new developments, how tokens should be distributed to the Uniswap community and developers, and more.
Users holding at least 1% of UNI tokens in circulation can introduce new proposals for a vote.
Following its launch, over 150 million UNI tokens were airdropped to users who had used the exchange to complete a transaction before September 1. Each user received 400 UNI tokens whose value was about $1,000 at that time.
Current CoinMarketCap data shows Uniswaps’s UNI price to be $22.54. In total, there are over 611 million UNI coins in circulation. Eventually, 1 billion UNI coins will be released to the market.
Where to Buy Uniswap
Almost all the major cryptocurrencies list Uniswap coins. Top places to buy Uniswaps UNI tokens in the US include:
- Coinbase Pro
- Binance
- Hotcoins Global
- OKEx
- Cash App
- GEMINI
- Crypto.com
- Kraken
- Robinhood
- Uniswap exchange
- eToro
Top places to buy Uniswap tokens in Canada include
- Newton
- NDAX
- Bitbuy
- VirgoCX
- Coinbase
- Binance
- Kraken
- Gemini
- Crypto.com
- Uniswap Exchange
How to Use Uniswap
You’ll need an ERC-20 compatible wallet to swap coins on the Uniswap platform. The best crypto wallets for Uniswap include Coinbase Wallet, MetaMask, Portis, and WalletConnect.
Add ether coins into the wallet. You’ll need ETH to pay for gas (Ethereum’s transactions fees) and trade on the platform.
Gas fees are determined by the network’s traffic and how fast you want your transaction to be processed by Ethereum network miners. You can choose between slow, medium, and fast execution. The faster the execution, the more the gas fee.
To complete a trade, visit the Uniswap website https://uniswap.org and click “Use Uniswap” at the top-right corner to connect your wallet. From there, you’ll have dropdown menu options to swap tokens directly using the “from” and “to” section.
Uniswap and the Future
There’s no doubt that Uniswap is one of the top DEXs to watch this year going forward. But it’s not the only game in town. Since its code is open-source, other platforms in the DeFi ecosystem like SushSwap, 1inch, and PancakeSwap have emerged that compete directly with it.
UNI’s price has also dropped after reaching an all-time high of $44.95 in May. As I write, the UNI price is just below $25, According to CoinMarketCap data.
While all cryptocurrencies are high-risk investments, future Uniswap’s prospects make it a promising investment possibility.
The platform remains focused on achieving faster settlements, lower gas fees, and lower latency trades. There are also rumors about a possible partnership with Robinhood, but that remains to be seen.
Related: