Uniswap is a decentralized exchange (DEX) protocol that allows users to swap ERC-20 tokens, which are tokens built on the Ethereum blockchain.
It uses smart contracts and an automated market maker (AMM) formula so that users can easily swap ERC-20 tokens without using third-party intermediaries.
Uniswap works by incentivizing token holders to put their assets in liquidity pools. An AMM then computes swapping rates depending on how many tokens are in each pool.
Because of arbitrage opportunities, buyers and sellers can swap tokens near market rates without waiting for someone on the other end to match their orders.
Note that Uniswap is permissionless. This means that there are no age, location, or other identity restrictions as to who can use the exchange. This also means that anyone can list any ERC-20 token on the exchange.
Uniswap’s ability to provide liquidity in a secure and decentralized manner makes it a key player in the DeFi space.
How does Uniswap work?
Each liquidity pool is a smart contract that holds reserves of two tokens and allows anyone to deposit and withdraw tokens from them, but only according to very specific rules.
One of the rules is following the Constant Product Market Maker (CPMM) formula x * y = k, where x and y are the reserves of two tokens, A and B.
To withdraw some amount of token A, one must deposit a proportional amount of token B to maintain the constant k before fees.
If a swap decreases Token A’s supply, for example, then the price will automatically adjust so that the next buyers will need to deposit more Token Bs to get the same amount of Token As.
Not only will traders not need to wait for someone to match their orders, but arbitrage opportunities also ensure that the CPMM price is close to the market price.
To swap coins, you’ll need to connect an ETH wallet containing your ERC-20 tokens and enough ETH for gas fees and connect it to Uniswap’s platform.
Trading on a DEX means that you (not centralized exchanges) have the private keys to your tokens.
You can also park your tokens in Uniswap’s liquidity pools. There’s a 0.05% to 1.0% fee for every swap made and liquidity providers (LPs) earn a fraction proportional to the liquidity they have contributed to the pool.
You’ll need to deposit an equivalent value of two tokens, which can either be an ETH and an ERC-20 token or two ERC-20 tokens. In return, you’ll get “liquidity tokens” representing your share of the pool’s transaction fees.
A recent update has even allowed liquidity providers to concentrate their capital within a custom price range.
The previous setup meant that your $1,000 would be used to cover liquidity for trades across ALL prices and that you’ll split profits with ALL LPs in the pool.
With Uniswap V3, you can concentrate your $1,000 within a popular price range and only split profits with LPs using the same range. Similarly, focusing your capital on less liquid price ranges would mean a bigger slice of the profit pie.
If your token isn’t on the exchange yet, then you can set up a Factory contract that would connect your token to the Ethereum blockchain and then make an Exchange contract to track its liquidity pools.
Unlike other exchanges that charge fees, users can list tokens in Uniswap for free.
Uniswap isn’t without its weaknesses. It’s vulnerable to Ethereum’s lags and high gas fees though developers are working on a scaling solution. Uniswap’s CPMM can also see slippages wherein large trades can cause price spikes.
Team background
Uniswap was launched in 2018 by Siemens Mechanical Engineer Hayden Adams, who built on Ethereum co-founder Vitalik Buterin’s blog posts about decentralized exchanges.
Adams remains CEO of New York-based Uniswap Labs where he works with COO Mary-Catherine Lader, former Managing Director of BlackRock, and Product Manager Will Hennessy, a former Google Product Manager.
What is the UNI token?
Though Uniswap started in 2018, it didn’t launch its native token UNI until September 2020 when it distributed 150M of its 1B UNI tokens to past Uniswap users.
UNI will be used as a governance token so that holders can vote on ecosystem development and fee allocation proposals.
UNI is available on major crypto exchanges and can be stored in any ERC-20 compatible wallet.
Token Metrics:
- Holder Addresses: 328K on Ethereum, 57K Binance Smart Chain (updated Oct. 2022)
- Circulating Supply: 753M UNI (Messari Oct. 2022)
- Supply: Initial max supply of 1B UNI
- Inflation Rate: Once 1B UNI has been distributed, the inflation rate will shift to 2.00% per year to ensure network use.