Uniswap exchange is a decentralized platform for swapping ERC20 tokens. To be more precise, Uniswap is the largest decentralized exchange (DEX), according to DeFi Pulse.
Unlike centralized exchanges where a focal power manages trades, Uniswap offers a middlemen-free platform. For this, Uniswap uses smart contracts and a unique pricing model that determines price depending on the liquidity pool balance.
The platform features a Uniswap liquidity provider ecosystem in which depositors add funds to various Uniswap pools and earn rewards. These Uniswap pools facilitate token swaps.
In this explainer post, we will dive deep into Uniswap’s innovative approach to exchange cryptocurrencies.
Let’s begin!
Uniswap exchange is a decentralized platform for swapping ERC20 tokens. To be more precise, Uniswap is the largest decentralized exchange (DEX), according to DeFi Pulse.
Unlike centralized exchanges where a focal power manages trades, Uniswap offers a middlemen-free platform. For this, Uniswap uses smart contracts and a unique pricing model that determines price depending on the liquidity pool balance.
The platform features a Uniswap liquidity provider ecosystem in which depositors add funds to various Uniswap pools and earn rewards. These Uniswap pools facilitate token swaps.
In this explainer post, we will dive deep into Uniswap’s innovative approach to exchange cryptocurrencies.
Let’s begin!
Uniswap Exchange – The Largest Decentralized Exchange (DEX)
Uniswap is a cryptocurrency exchange built on Ethereum blockchain where you can exchange ERC-20 tokens against other ERC-20 tokens in a decentralized manner. The platform was launched in November 2018 by Hayden Adams. However, the technology behind Uniswap was inspired by Ethereum’s founder Vitalik Buterin.
Instead of matching buyers and sellers, the exchange uses smart contracts to facilitate token swaps. Also, the price is determined by a constant maker model that balances the price in the liquidity pool. Thanks to these innovations, Uniswap offers an intermediary-free exchange platform.
Uniswap doesn’t keep a buck for services offered on the platform. The trading fee is distributed to the liquidity providers based on their share of the pool.
There are over 500 trading pairs listed on Uniswap. The daily trading volume of the top 50 of these 500 trading pairs is around $500,000. Moreover, there is around $2.53 billion deposited by Uniswap liquidity providers as of now. Considering there was less than $25 million locked in May 2020, this is a skyrocketing growth.
Currently, there is $3 billion deposited in Uniswap by liquidity providers. That’s pretty incredible, considering that in May of 2020, there was less than $25 million locked up. This is exponential growth! Moreover, Uniswap surpassed Coinbase in daily trading volume on August 30, 2020.
Yes, you got that right! The use of smart contracts and a unique pricing mechanism make Uniswap the largest DEX with around $2.53 billion locked in Uniswap smart contracts (as of now).
How does Uniswap Work?
Unlike traditional exchanges, Uniswap does not have order books, nor does it match buyers and sellers for a trade. Instead, Uniswap uses Automated Market Maker, smart contracts that hold liquidity for facilitating token swaps. Anyone can be a Uniswap liquidity provider and add funds to these smart contracts and earn liquidity mining rewards.
To be a Uniswap liquidity provider, you need to deposit two tokens in an equal ratio. For instance, you decide to contribute liquidity to the ETH/USDT pool. If you deposit $100 worth of ETH, you need to fund the pool with an equal amount of USDT.
As discussed, the Uniswap exchange operates in a decentralized setting; there is no central authority determining the token price. The price of crypto tokens in Uniswap pools is determined using a simple math equation – x*y = k. Here, x and y represent ETH and ERC20 tokens, and k is a constant. This pricing model is called Constant Product Market Maker.
Say you swapped ETH (x) for USDT (y), thereby increasing the ETH volume of the ETH/USDT pool. The equation will balance the difference and determine the price of the token.
Currently, you can contribute liquidity to four Uniswap pools;
- ETH/USDT
- ETH/USDC
- ETH/DAI
- ETH/WBTC
UNI Token
Uniswap exchange launched their native governance token – UNI in September 2020. The UNI raindrop of 400 tokens made Uniswap users $1,000 richer.
Talking about token utility, UNI token holders can participate in the governance of the Uniswap protocol. Your vote’s weight depends on the amount of token you hold; the more UNI you hold, the more important your vote.
The supply of UNI tokens is hard-capped at 1 billion units, which will be released over the course of four years. After all the tokens are in circulation, Uniswap will induce an inflation rate of 2% for ensuring active user participation. Currently, 26,97,75,532 UNI tokens are in circulation.
Here’s UNI token distribution –
- 60% (600,000,000 UNI) – Uniswap community members. Out of this 60%, 15% is distributed to Uniswap users.
- 266% (212,660,000 UNI) – For team members and future employees with a 4-year vesting period.
- 044% (180,440,000 UNI) – To investors with a 4-year vesting time.
- 69% (6,900,000 UNI) – For advisors with a 4-year vesting schedule.
You can purchase UNI tokens from Uniswap exchange.
Uniswap V2
Uniswap V2 is an update to the existing Uniswap protocol that offers major technical improvements and some amazing features such as flash swaps, ERC20 / ERC20 pairs, and price oracles.
Here’s an overview of some major additions.
1. ERC20 / ERC20 pairs
Uniswap V1 ecosystem only listed ETH/ ERC20 token pairs, which made it difficult for users to access more diverse ERC20 tokens. However, the V2 update has listed ERC20 / ERC20 pairs without mandatory routing through ETH.
2. Flash swaps
With flash swaps, you can withdraw ERC20 tokens without posting any collateral. The only condition is that at the end of the transaction, you pay the borrowed amount in full.
3. Price Oracles
Price feeds are critical for decentralized services. Uniswap V2 incorporates on-chain price feeds that measure the market price of the concerned trading pair before the trade is executed.
The Bottom Line
Uniswap is a pioneer of decentralized exchanges. The platform enables users to exchange ERC20 tokens without any intermediaries. For this, Uniswap uses smart contracts and a Constant Product Market Maker model for determining token prices.
Moreover, Uniswap has improved its protocol with V2 updates adding more features for users.
