Decentralized finance has been at the center of the cryptocurrency blaze recently, and the liquidity pool is an essential aspect o...
Explore a comprehensive review of the crypto exchange Uniswap and its newly launched DeFi token UNI that has already made waves in the crypto space by surging sevenfold in just a week.
Uniswap is simply a decentralized protocol for automated liquidity provision based on Ethereum. In simpler terms, Uniswap allows the automatic sale and purchase of ERC-20 tokens, relying on its ability to alter tokens’ values.
The protocol is effectively trying to solve the problem of liquidity in decentralized exchanges by allowing the exchanges to switch tokens without the intervention of buyers and sellers. The platform has turned out to be one of the largest Ethereum-based decentralized exchanges.
Unlike most exchanges, which charge transaction fees, Uniswap is designed to no to. It was created as an avenue for its community to trade tokens without charges. Another unique feature about Uniswap is its ability to use a simple math equation, pools of tokens, and Ethereum to join buyers and sellers on the platform, execute trades, and determine prices; unlike most exchanges, not that automated.
Hayden Adams created the widely used Ethereum-based exchange. Before the creation of Uniswap in November 2018, Adams worked as a mechanical engineer at Siemens. After he was laid off at Siemens, he was inspired to get into the crypto world via Ethereum by his Friend, Karl Floersch, who worked at the Ethereum foundation at the time.
He built his first proof-of-concept, including a smart contract with a single liquidity provider, and allowed simple swaps. A graduate of mechanical engineering from Stony Brook University, he is also inspired by Ethereum founder Vitallik Buterin.
The distinction between Uniswap and other DEXs is mainly the fact that Uniswap adopts a pricing mechanism known as the Constant Product Market Maker Model (CPMMM)
When funding the Uniswap wallet, Ethereum or ERC20 based tokens can be used. This involves making an exchange for the token to be used by launching a new Uniswap smart contract for the particular token and then creating a liquidity pool with a specific amount of the token and the same value in ETH. Uniswap uses a constant equation (x * y = k) to determine the price automatically instead of matching buyers and sellers like other crypto exchanges.
In the equation, x and y equal the quantity of Ethereum and ERC20 tokens provided by the liquidity pool, and k is taken as a constant. This equation employs the relationship between ERC20 tokens and ETH and the application of supply and demand to determine the value of that particular token accurately.
For example, when a user buys USDT tokens with ETH, the supply of USDT diminishes, and the supply of ETH increases, making the price of USDT to increase, meaning the price of a token in Uniswap can only grow if exchanges are made. In principle, what Uniswap does is balance out the value of the particular token and the exchange based on the demand and supply chain.
Each token has its smart contract and liquidity pool, and virtually any Ethereum based token can be listed on Uniswap with absolute freedom and no permission required. Uniswap even goes as far as to create a smart contract and liquidity pool for tokens that don’t possess such. Once these conditions have been met, all users are at liberty to trade the token or add to the liquidity pool with an equal value of the token and ETH and earn a 0.3% liquidity provider fee.
It is free to include tokens on the platform as Uniswap does not demand management fees, and it is a DIY process to include the tokens; by dialing a feature on the factory contract. This is done by using ‘CreateExchange’ on the platform. The feature then confirms the existence of an exchange contract already started for registration.
Uniswap possesses two different contracts on its platform; the first is an exchange contract, which is unique for its distinct token and Ether that can be exchanged simultaneously. The other contract is the factory contract, which simulates exchange contracts and includes ERC20 tokens into its log address.
When there is an ETH/ERC20 trade, the tokens are deposited into a Uniswap liquidity pool. The user who traded the tokens is given a pool token that can be taken as ERC20 tokens. These tokens can be freely exchanged or moved, and when the funds are withdrawn, the pool tokens are destroyed by Uniswap.
Each pool token represents the user’s share of the total assets of the pool token. Furthermore, the user shares from the pool’s 0.3% trading fee. The ERC20 is used as a basic payment unit, like getting incentives, interests, debt bonds, and so many other options.
The Uniswap tokens can be gotten from the platform uniswap.exchange. It is also imperative for the user to have an Ethereum address as the exchange is Ethereum based. After these, the user can now add tokens to a Uniswap liquidity pool. The user can select any token to swap with another as there is a vast array of tokens on the platform. The user then needs to approve the transaction using their wallet and then confirm the swap. Yes, it’s that easy!
Uniswap allows several payment interfaces to add funds to Uniswap pools without necessarily needing to access the Uniswap user interface. IntstaDApp allows the user to deposit funds to the Uniswap pools without going through the Uniswap interface. Users can also use Zapper.fi to add funds using just ETH instead of the usual way of adding ETH with another ERC20. This goes in line with Uniswap’s goal to create a platform where several official and unofficial resources build on the protocol.
Uniswap UNI token was launched in September 2020 and gave free 400UNI tokens to every wallet that used the Uniswap protocol before September 1, 2020. So far, over 150 million UNI tokens are up for grabs, with 66 million units claimed in the first 24 hours alone. Although Uniswap plans to distribute 40% of the tokens in the first year, it will slow down distribution by 10% each subsequent year until the total allocation of all the tokens is achieved.
1 billion UNI token is to be distributed over 4 years with the Uniswap community, the highest beneficiaries (60%), and 21.5% allocated to its employees and the remaining 18.5% going to investors and advisors. This shows the desire for Uniswap to become a community-operated crypto ecosystem.
Although Uniswap launched in 2018, it has been evolving ever since. The first version of UNI’s success is still being heralded, but Uniswap is looking to launch the new Uniswap V3, which is a massive upgrade from the V2 already released. The V2 allows the direct ER20/ER20 trades, omitting ETH out of the equation where possible.
The new protocol also supports the initially incompatible tokens like OMG and USDT and boasts a major tech improvement that makes Uniswap more appealing to the crypto world. This is a stepping stone towards greater things for Uniswap, currently the leading DeFi platform by total value locked (TVL).
Uniswap is becoming a mainstay in the crypto world and is living up to its potential, with UNI token surging from a startup price of $1 to $7 in just the first week it launched.