Ever since crypto has become a popular investment tool, its trading has been dominated by centralised exchanges. One of the main advantages of centralised exchanges is the high trading volume available on the platforms. However, the fact still remains that a single entity or company controls them. Uniswap V3 offers an alternative by being one of the first and most popular decentralised exchanges.
What is Uniswap?
As mentioned above, Uniswap is a decentralised exchange (DEX) built on the Ethereum network. Unlike other businesses, which are controlled by central authorities, Uniswap is not under the control of any one entity. It is owned by no one and operated automatically through blockchain technology.
Another feature of Uniswap is its open-source nature. This means you can easily look up the project’s source code and verify all of its features are implemented as intended. In addition, you can list your crypto tokens on the platform for free. Since there is no for-profit company behind the DEX, the only fees charged on the platform are to sustain its operations.
How Does Uniswap Work?
Centralised exchanges work with order books, which are ledgers of buy and sell orders posted on the platform. Suppose you wish to sell $100 of Ethereum. This will only execute if there is a buy order of $100 or more from another user.
On the other hand, Uniswap uses two features to enable its functionality – Automated market makers and liquidity pools. Both of these are enabled through smart contracts
What are Smart Contracts?
One of Ethereum’s main innovations on release was the implementation of smart contracts. These are sets of code that automatically execute when their requirements are met. This removes the need for an intermediary since all parties can be sure the contract will execute when required.
Smart contracts are used for a range of applications like minting NFTs, governance or – like Uniswap – for financial applications.
Automated Market Maker and Liquidity Pools
Liquidity pools are smart contracts that provide crypto funds as liquidity for DeFi protocols to use – hence the name. Uniswap liquidity pools contain equivalent values of two tokens like ETH/DAI. This allows users to complete orders without a counterparty. Instead, their new tokens are drawn from these liquidity pools.
An automated market maker (AMM) is a tool that allows access to liquidity pools and decides the prices of tokens on the platform. Suppose a trader wants to exchange DAI tokens for ETH, the AMM will pull ETH and add more DAI to an ETH/DAI pool. Since there is less ETH than DAI, the price of Ethereum tokens will rise.
How does Uniswap make money? Since Uniswap is a decentralised protocol, no central party needs to earn a profit. Uniswap thus does not earn money. Instead, all fees are distributed to liquidity providers, who enable the network to function.
How To Use Uniswap?
It is simple to get started with Uniswap. The first step is to create an Ethereum-compatible crypto wallet. Uniswap supports several options like Metamask, Coinbase and Trust wallets.
Second, you need a small amount of ETH tokens to pay transaction fees on Uniswap. Once you link your wallet to the Uniswap platform, you can begin trading seamlessly.
Uniswap is a DEX using liquidity pools to create an efficient market. Unlike other platforms, you can earn passive income on Uniswap through a process known as liquidity mining or liquidity staking.
Read more: What is Staking Crypto
This involves depositing your crypto assets in a liquidity pool and earning crypto rewards for it. It allows you to obtain both liquidity provider (LP) rewards and a portion of the network fees.
Uniswap Pros and Cons
|It is Ethereum Based
|Unclear APR and APY
|Gives access to passive income
|Ethereum complications can be a deterrent
|It is completely decentralised
- Ethereum-based – Ethereum is currently the most popular blockchain for dApp and DeFi functionality. Using Uniswap thus enables you to fully utilise this rich network to the fullest.
- Passive income – Becoming a liquidity provider on the Uniswap platform gives you easy access to passive income. Since you can earn LP rewards as crypto tokens, it is a very simple alternative investment.
- Decentralised – Uniswap is a completely decentralised network. As mentioned above, there is no company or individual in control of the platform. It is instead maintained and run by its large and passionate community.
- Unclear Returns – Uniswap’s liquidity pools do not mention the returns you can expect from them – there is no APR or APY mentioned. This makes it very difficult to evaluate them for new investors.
- Ethereum Complications – While Ethereum is the most popular DeFi network, it has its own share of issues. Its network congestion and sky-high gas fees can be huge deterrents for many users.
What Makes Uniswap Special?
There are a few important characteristics that make Uniswap unique. Firstly, any ERC-20 compatible token can be listed on Uniswap – you do not need anyone’s permission to do so. All you have to do is create a liquidity pool with equal amounts of the new token and another ERC-20 token like ETH or DAI.
Second, the pricing model used by the platform is x * y = k. Here, x and y are the quantities of tokens in the smart contract, while k is a fixed constant. The ratio of tokens in the smart contract determines the price of the token.
How To Claim Uni Token?
If you have used Uniswap before, you can probably claim 400 free UNI tokens from the platform. To do this, simply visit app.uniswap.com and connect the wallet you used to access Uniswap. Next, click on “Claim your UNI tokens” to obtain your free reward.
What is the Future of Uniswap?
Uniswap is a very promising DeFi application. It is the most popular decentralised exchange for crypto tokens, meaning it has a very large and active user base. Its innovative protocol structure and opportunity for passive income also make it a compelling option for new users.
Read more: 8 Ways To Earn Passive Income Through Crypto
However, Ethereum has its own set of issues like congestion and gas fees that can cross the original transaction value. While this may be solved with further upgrades to the Ethereum network, it remains to be seen.
FAQs on What is UniSwap
At what price is Uniswap(UNI) trading currently?
As of Jan 2nd,2023 Uniswap(UNI) is trading at $5.33. It has a total market capitalisation of $4,060,761,194.
Is Uniswap an open-source platform?
Yes. Uniswap is an open-source platform. This means you can easily look up the project’s source code and verify all of its features are implemented as intended.
Is Uniswap a centralised or a decentralised entity?
Uniswap is a decentralised entity with no single point of failure. It is operated by a community of members and uses the Ethereum blockchain.