Uniswap is one of the most popular decentralized exchanges (DEXs) built on the Ethereum blockchain. To be more specific, it is a mechanism for automatically managing liquidity. In order to make transactions, there is no requirement for an order book or any centralized party. Since there are no intermediaries involved, Uniswap is highly decentralized and resistant to government regulation. For DEXs, it is tagged as the undisputed market leader in terms of sales volume.
Unlike most exchanges, Uniswap charges a liquidity pool fee for every transaction on its platform. It was created to facilitate the exchanging of tokens among members of the community, conducting trades, and computing pricing using a simple math equation and pools of tokens.
Hayden Adams developed the Uniswap protocol in 2018, with Ethereum co-founder Vitalik Buterin, who on the other hand, mapped out the underlying technology that influenced the implementation.
How it works
In that it does not have an order book, Uniswap deviates from the standard design of digital trading platforms. It is able to run by utilizing Constant Product Market Maker, which is a type of Automated Market Maker (AMM).
Alternatively known as a liquidity reserve or a liquidity pool, an automated market maker is a smart contract that keeps a liquidity reserve against which traders can swap tokens. Liquidity providers contribute to the funding of these reserve funds.
Anyone who makes a contribution to the liquidity pool in the amount of two tokens is referred to as a liquidity provider. Traders pay an administration charge in the liquidity pool; this charge is then distributed to liquidity providers or pool contributors in proportion to their respective shares of the pool.
Liquidity providers create a market for the exchange of tokens by depositing two tokens of equal value. These transactions can be carried out using ETH and an ERC-20 token, or two ERC-20 tokens combined. However, stablecoins such as USDC and USDT are frequently found in these pools, but this is not a prerequisite.
Why does Uniswap stand out
The permissionless nature of Uniswap allows it to host assets and trading pairings that are not available on custodial alternatives.
Because of the platform’s ease of use and accessibility, it is the first stop for new Ethereum-based assets to be listed and traded. The liquidity and fees offered by Uniswap remain competitive even if new trading pairs are added in contrast to custodian exchanges like Binance.
For trading, transferring, or investing in liquidity pools on Uniswap, you do not have to be approved. As long as an Ethereum wallet and an internet connection are available, everyone can participate. In countries with strict financial regulations, this feature of Uniswap and decentralized exchange may be particularly interesting to users who value their privacy.
There are no limitations on the trading pairs that can be supported or given by Uniswap. In order to start the initial liquidity pool, anyone can form a trading pair between two Ethereum-based assets, and everyone can participate. Because of this, there are a wide variety of trading options for a wide range of assets.
Uniswap V2 and V3
Uniswap’s technology has undergone numerous improvements. For those who have previously used Uniswap, version 2 will look very familiar to newer models. Note that the first edition of Uniswap threatened the viability of liquidity pool providers (v1). This means that v1 should be regarded as the minimal viable product that was released for beta testing or, in certain cases, alpha testing as well.
To avoid using Wrapped Ether (WETH), Uniswap V2 was published in May 2020. Uniswap V2 supports non-ERC20 tokens like OmiseGo (OMG) and Tether (USDT), among other improvements that make the software more appealing to users. Additionally, Uniswap V3 has been made accessible for download on the Optimistic Ethereum network, and users can also take advantage of this.
It introduces concentrated liquidity allowing limited providers to exercise tight control over the price ranges in which their capital is invested. Individual positions in a pool can be aggregated into a single combined curve, which traders can trade against. Uniswap v3 is the most flexible and efficient AMM ever created.
The introduction of concentrated liquidity was the most major change in version 3.0. Liquidity suppliers have the ability to dictate the terms and conditions under which they would be compensated in this new form of liquidity.
Uniswap native token (UNI)
The term “governance token” is one of the prominent terms used to characterize the UNI token. Token holders are now able to vote on new features and advancements, as well as tweaks to the fee structure.
This covers the manner in which tokens are allocated to the community and developers, amidst other implementations. When the UNI token was introduced in September 2020, it was intended to deter users from transferring to a competing DEX, SushiSwap.’ SushiSwap had enticed users from the Uniswap platform to allow conversion of their funds to the new platform by awarding them with SUSHI tokens just a month before the official debut of the UNI tokens.
In its response, Uniswap created 1 billion UNI tokens, giving away 150 million of them to anybody on the platform, about 400 UNI tokens which were valued at more than $1,000 at the time were distributed. Due to the platform’s broad range of tokens, users can easily swap one for another. Because the exchange is based on Ethereum, all users must have an Ethereum address to make use of the DEX.
Uniswap is an Ethereum and DeFi hit. It has grown significantly since its launch in 2018, with the new version of its software, dubbed Uniswap V3, which is a major advance over the V2. Tokens such as OMG and USDT, which were previously incompatible with Uniswap, are now supported by the new protocol, which represents a huge step forward in terms of crypto technological innovation.
Cryptocurrency enthusiasts have great expectations for UNI and believe it will be a suitable foundation for the creation of new decentralized applications. Although the future appears bright, the long-term health of the digital currency industry will be determined by the successes of innovative platforms like Uniswap as a whole.