The Rise of Uniswap


03 March 2021 | ZebPay Trade-Desk

Uniswap operates as a decentralized automated liquidity pool and is an on-chain system of smart contracts built on the Ethereum blockchain. It is a governance protocol, accessible to all, and built with the purpose to allow anyone with an Ethereum wallet to exchange tokens with reduced costs and ease, without any interference of any central authority.  

The on-chain smart contracts consist of reserve pools of two assets (ERC 20 Token & ETH), and provide liquidity to these assets, but at the same time, it also ensures that the product of the reserves never decreases. Traders typically pay a 30 basis point fee on trades, which then gets allocated to the liquidity providers, as an incentive to maintain the pool. 

UNI is the native token of the Uniswap protocol. Holders have governance rights and can vote on the development of the protocol. 1 billion UNI tokens were mined at genesis, and approximately 60% are distributed to the existing Uniswap community. The remaining 40% is available in the marketplace, for investors and traders alike.

Uniswap (UNI) Summary (at the time of writing):

Market Capitalization$8,089,513,766.18
Current Price$25.95
24 HR Volume $1,030,523,929.38
All Time High/Low$32.63 / $0.4190
Script in Circulation 311,709,498 UNI
Total Supply 1,000,000,000 UNI

The Uniswap protocol has recently undergone an upgrade, now referred to as Uniswap v2. This upgrade has made room for some key attributes and improvements in the protocol. Namely, Uniswap v2 allows the liquidity providers to create pair contracts for any two ERC-20s, whereas earlier the protocol required ETH to be a fixed asset among other ERC20 tokens. This rule has significantly reduced costs on liquidity providers and has also reduced slippages to a large extent.

In addition to that, Uniswap v2 now uses a more widely implemented smart-contract language, Solidity, which allows for better interpretation and the return values of non-standard ERC-20 tokens and hence provides more widespread applicability. The contract architecture has only been redesigned, making it easier to identify bugs. This is a key improvement, as it protects the interests of liquidity providers, minimising risk, and further enhancing the security and reliability of the network.

Another noteworthy change is the introduction of flash swaps. Uniswap v2 adds a new feature that allows a user to receive and use an asset before paying for it, as long as they make the payment within the same atomic transaction. In the case of insufficient funds, the contract will revert the whole transaction. A user may repay the Uniswap pool using the same token, instead of completing the swap.

Uniswap is unique in the sense that it has completely redefined the way we think about limit order books. As mentioned in our previous report on Uniswap, market makers no longer specify a price upon providing liquidity, but provide funds and Uniswap takes care of the rest. Hence the network has no listing fees, and any UNI token can be traded provided a liquidity pool is available. Automated market makers and smart contracts are used to hold and maintain these liquidity reserves, which allows for trades to be executed without the presence of any intermediaries. Hence UNI, in its true sense, is decentralized to its very core. 

Investment Analysis:

Since its launch in late 2020 UNI has traded in a wide range, after opening at $ 3.44, the price it hit was $ 32.63 appreciating more than 400% within its first few months of launch. The lowest price it has witnessed is $ 0.42, which was below its ICO price.

Uniswap has become a key player in the DeFi space, and since the protocol has undergone an upgrade, it has seen significant traction and interest among crypto enthusiasts and investors. As the DeFi space continues to grow, and DApps gain momentum, Uniswap is more than likely to be a key beneficiary. Uniswap has made major strides in this space, thanks to its prudent governance mechanisms, coupled with its ability to engage effectively with liquidity providers.

The table below shows how returns of different DeFi assets have been shaping up, across different time periods namely on a YTD basis and since their inception respectively. In addition, we have also made an attempt to calculate and reflect the total amount is USD locked into these assets, to show an absolute representation of the belief that the industry as a whole has in these assets and the DeFi space in general.

YTD ROI (%)277.4286.13353.8959.06453.2
ICO ROI (%)9871.53416.8874934.913156.11679.94
Locked USD Value6.18bn4.97bn4.84bn0.32bn3.74bn

As seen in the table above, UNI has shown incredible returns YTD. This is partly due to the growing interest in the asset among crypto enthusiasts and traders, and partly due to the improvements and upgrades made to the protocol. At 453%, it has appreciated the most, among tokens in the DeFi space. ICO ROI has also been impressive, at ~700%, but it is only in recent times that much of this return can be attributed to. The belief in this asset class is further enhanced by looking at the locked USD value in UNI, and other DeFi assets and this has been only increasing in recent time, reflecting that the DeFi space is here to stay.

Uniswap is still in its early stages of growth, but has been showing a lot of promise and with its recent upgrades UNI makes for an interesting offering in the DeFi space. 


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