Uniswap is one of the widely used decentralized crypto asset exchange platforms.
10 years ago if someone told you to go to a place called Uniswap or Pancakeswap or Sushiswap to exchange money, you would have dismissed it as a scam. Crypto culture has always had an eerie mix of money and memes. In fact, Dogecoin (DOGE) was created as a joke. But look at what happened now. Accepted by tech giants like Tesla, DOGE has a market cap of $13 billion. Uniswap, for example, is one of the widely used decentralized crypto asset exchange platforms. In today’s article we will understand what Uniswap is and how it works.
What is AMM?
Before we enter the world of curves, we need to understand a concept called Automated Market Makers (AMMs). Uniswap (which is an AMM) allows digital assets to be traded without the need for a central exchange by using pools of liquidity, as opposed to traditional trading between buyers and sellers. At its core, users tokenize liquidity pools and the prices of the tokens in the pool are determined by a simple mathematical formula. Anyone with few ERC-20 tokens can become a liquidity provider by delivering tokens to an AMM’s liquidity pool. Liquidity providers receive a fee for providing tokens to the pool. The fee is paid by traders using a liquidity pool to exchange tokens.
How does Uniswap work?
Uniswap works with a smart contract deployed on the Ethereum (ETH) blockchain. The smart contract allows users to easily exchange ERC-20 tokens. Enter the token you wish to trade and the contract will calculate the amount of tokens you will receive. To determine the prices of tokens, Uniswap uses AMMs to calculate based on token supply and demand.
The Uniswap protocol also has a built-in incentive for users to provide liquidity. Uniswap has a 0.3% fee (two tiers are also available) for crypto swaps. In order to provide liquidity to a pool, a user must deposit an equal value of both tokens into the pool. For example, if a user wants to provide liquidity to the ETH/DAI pool, they need to deposit 1 ETH and 1 DAI into the pool. The user then receives a portion of the fees charged by the pool.
Uniswap Story: V2 and V3
Uniswap was created by an Ethereum developer named Hayden Adams. Originally known as Unipeg, the DEX was inspired by the idea of Ethereum founder Vitalik. Shortly after Uniswap was founded, it became a DAO (Decentralized Autonomous Organization). This means that it is governed by a group of people rather than a single entity. The UNI token was created in September 2020 and is used to decentralize the administration of the Uniswap protocol.
The first version of Uniswap was launched on the Ethereum mainnet in November 2018. The protocol was created to facilitate ERC20 token trading. Uniswap has since gone through two upgrades. Uniswap V2 introduced features like ERC-20 pairs, flash swaps and price oracles.
The latest version, Uniswap V3, was launched last year. This new version has better infrastructure, more precise execution of trades and liquidity providers can achieve better efficiency with more control over price ranges.
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Disclaimer: This article was written by Giottus Crypto Exchange as part of a paid partnership with The News Minute. Investments in crypto assets or cryptocurrencies are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about investing.
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