Uniswap brings to life the reality of a truly decentralized exchange, and the possibility of exchanging any token without a middleman. Anyone with an Ethereum address can contribute to its liquidity, and earn from it.
Picture a bank, called The Bank of Uniswap. The Bank of Uniswap works exclusively in foreign exchange markets – helping people exchange one currency into another, while charging a small fee. You too, can earn a portion of these fees by depositing your own currency into the Bank of Uniswap – which it uses to help more people convert one currency to another.
What makes the Bank of Uniswap different from any other financial institution, then?
Well, for one – it exchanges cryptocurrency instead of fiat currency. It is also entirely decentralized, and does not have anyone “in-charge” of its day-to-day operations, handing the responsibility to smart contracts on the Ethereum blockchain instead.
How does Uniswap Work?
At its core, Uniswap is two smart contracts – a “Factory” contract and an “Exchange” contract – working together in tandem with an open-source front-end client.
Factory contains an exchange registry, and a method to deploy the Exchange contract for a particular ERC20 token. In turn, Exchange can support any ERC20 token. Every ERC20 token therefore, by design, uses its own Exchange smart contract.
Uniswap is built entirely on the Ethereum blockchain, and is not dependent on any external processes. This means you can access its full capabilities and embed them into other apps without needing specialized programs or tools.
Once you set the Factory and Exchange contracts to work together, you’ll have created a fully-functional decentralized exchange – which you can then use to swap ERC20 tokens for ETH and vice versa.
Most exchanges maintain an order book and facilitate matches between buyers and sellers. Uniswap, on the other hand, holds liquidity reserves of various tokens by charging a 0.3% fee on all trades.
You can also contribute your own tokens to add to Uniswap’s liquidity pools. If you ever decide to take back your tokens, you’ll also get a share of the fees that were earned from the tokens you added.
Uniswap brings to the table a new form of decentralized token exchange which will give us a better reflection of its benefits as time passes. You can learn more about the project’s progress from its whitepaper here.