Uniswap is a decentralized exchange running on Ethereum where cryptocurrencies can be bought, sold and traded.
Uniswap aims to offer a similar service to traditional exchanges without relying on a central operator to keep an order book for buyers and sellers to place orders. Instead, Uniswap relies on a collection of liquidity pools to provide a similar service.
Uniswap was the first decentralized exchange (DEX) to successfully deploy an Automated Market Maker (AMM) model to enable trusted trading of digital assets. Users can “provide liquidity” by depositing their crypto into Uniswap’s pools of paired digital assets. This Liquidity Pools They then serve as trading resources for other users, allowing the exchange of one token for another with minimal fees, fast performance, and trusted execution.
Although many DEXes have been developed since then, Uniswap enjoys a first mover advantage. At the peak of the cryptocurrency market in 2021, Uniswap had over $10 billion in total value (TVL) in its log. It has been deployed on Ethereum and its various Layer 2 (L2s) solutions such as Arbitrum, Optimism, and Polygon.
UNI is an Ethereum-based ERC-20 token used by the Uniswap community to vote on governance proposals and make changes to the protocol.
How was Uniswap developed?
Uniswap was created by Hayden Adams, who first started coding Ethereum smart contracts after leaving Siemens as a mechanical engineer in 2017. He started work on an early AMM protocol based on descriptions by Ethereum inventor Vitalik Buterin. (In fact, the project was originally called Unipeg, and Buterin himself suggested Uniswap as an alternative.)
There have been two major updates to the Uniswap protocol since its initial release. Uniswap v2 was released in May 2020 and introduced several features including a new way to track crypto prices and a new front-end interface. Uniswap v3 was launched a year later and further enhanced some of the features introduced in v2 and added concentrated liquidity functionality (details below).
Uniswap is continuously maintained by Uniswap Labs, led by Hayden Adams as CEO. Some of the project’s initial funding came from a grant from the Ethereum Foundation, but in the years that followed, the project was mostly funded by private venture capital firms. In October 2022, Adams announced a $165 million funding round with participants including Polychain Capital, Andreessen Horowitz, and Paradigm.
How does Uniswap work?
Automated Market Maker (AMM)
Use traditional market makers order books, which are lists of “buy” and “sell” orders grouped by price. When buyers and sellers agree on a price, the market maker facilitates trading between them.
As an alternative to an order book, Uniswap uses a series of smart contracts to generate an order book Automated Market Maker (AMM). Instead of trading with other traders’ orders, users of an AMM trade against liquidity pools (LPs) containing paired crypto assets. There are two basic users of an AMM:
- Liquidity Provider – These users deposit cryptocurrencies into liquidity pools, providing the liquidity that allows traders to trade between different assets. For example, a liquidity provider must deposit equivalent amounts of ETH and DAI into a pool. In return, they receive LP tokens representing their share of the ETH/DAI pool. As long as their funds are deposited and they hold LP tokens, they have the right to charge fees every time the pool is used for swaps.
- Dealer – These are users who exchange tokens in the liquidity pools. They indicate which asset they want to exchange for another and how much. In the same example, when a trader wants to exchange 1 ETH for a corresponding amount of DAI, they submit the trade through Uniswap’s front-end interface and the platform’s smart contracts initiate an interaction with the ETH/DAI pool. They pay a pool-specific fee for each swap they perform, which is shared among the pool’s liquidity providers.
For this process to work properly, the prices of each pool’s tokens must adjust with each exchange, so that there is a constant value of both tokens in each pool. This is achieved with the Constant product formulawhich states that the balance of “token x” multiplied by the balance of “token y” is a constant “k” (x * y = k).
For example, if an exchange results in DAI being deposited into a pool and ETH being withdrawn, then the price of DAI will adjust downward as the price of ETH increases. Arbitrage traders exploit small differences in asset prices between markets to keep them relatively stable and accurate.
Concentrated Liquidity
In previous versions of Uniswap, users had to provide liquidity at theoretically infinite prices of a crypto pair. For example, most trades for a stablecoin occur in a tight range between $0.99 and $1.01, meaning that liquidity providers would “waste” their capital by providing liquidity outside of this range.
Hence, Uniswap v3 introduced the concept concentrated liquidity. This allows users to define a price range (e.g. $0.99 to $1.01 in the example above) for which they will provide liquidity. They collect more fees when swapping within this range – which they usually do – and increase their capital efficiency, or the relative returns their holdings generate.
Other features: Oracle and NFT trading
Uniswap ensures stable prices for digital assets Oracle, a software that allows smart contracts to communicate with the world outside of the blockchain. Uniswap v3 introduced TWAP (Time Weighted Average Price) oracles that stored historical price data of crypto pairs to maintain accurate pricing. Uniswap v3 improved this system by making it easier and cheaper to access the TWAP Oracle data.
In June 2022, Uniswap acquired Genie, an NFT marketplace aggregator, allowing users to trade NFTs on the Uniswap platform in November 2022.
How is the UNI token used?
The UNI token is used to drive the protocol by voting on proposals, setting liquidity pool fee structures, deciding to launch the protocol on alternative networks such as L2s, and determining how funds are spent in Uniswap’s community treasury ( which amounted to just over US$2). billion in December 2022). UNI can also be delegated by users to other parties to vote on their behalf.
token distribution
In September 2020, Uniswap announced the launch of UNI with a total supply of 1 billion UNI tokens. Of this, 60% was allocated to the community, including an “airdrop” of 400 UNI that anyone who had ever used Uniswap v1 or v2 could claim, worth about $1400 at the time.
Another 21.3% of the offer went to the project and its founders, 0.7% to consultants and 18% to investors. All tokens distributed to these latter groups should be subject to a four-year vesting schedule until 2024.
After all tokens are circulated in 2024, there will be a permanent inflation rate of 2% per year, increasing the total supply by 2% per year.
Uniswap Basics
- Uniswap is a decentralized exchange that pioneered the use of an automated market maker (AMM).
- Uniswap’s AMM includes two types of users – liquidity providers and traders – and uses liquidity pools as intermediaries to enable trusted exchanges of digital assets
- The UNI token is used to control the protocol and allows the community to vote on proposals that control Uniswap’s fee structures and other core aspects
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