Uniswap UNI

All You Need to Know About Uniswap

Uniswap is an open-source Web3 protocol built on the Ethereum blockchain. The main application of this protocol is the Uniswap DEX (decentralized exchange), which allows users to buy and sell a wide variety of digital assets, such as cryptocurrencies, tokens, and other blockchain-based assets.

DEXs

The idea behind decentralized exchanges is that no single authority has the power to control others' assets. Because of blockchain technology, every transaction is permissionless and transparent. By removing the central authority, there is no use for the traditional order-book method of trading. 

They use smart contracts and automated market makers (AMMs) to facilitate trades and allow users to retain control of their assets by storing them in a personal wallet. DEXs offer greater security and privacy compared to centralized exchanges, but may not be as user-friendly. Unlike DEXs, centralized exchanges also offer trading pairs with fiat currencies.

• Greater privacy and security
• Censorship resistant, self-custodial
• No need to trust authority
• Less user friendly than centralized exchanges
• Smart contract code risk
• Crypto-only trading pairs

Brief history

The project was founded in 2018 by Hayden Adams, a software developer, and entrepreneur. From that point on Uniswap has had several important versions and many features were added over time.

Uniswap V1: Original version of Uniswap from the year 2018. The first use of AMMs. On Ethereum blockchain and supported only Ethereum-based assets.

Uniswap V2: Launched in May 2020. Added support for ERC20 tokens. The first utilization of liquidity pools. Because Uniswap is open-source, the code was forked and a lot of users at that time were taken over by competing DEXs, namely SushiSwap.

Uniswap V3: Released in May 202. Added support for DeFi protocols built on other blockchain networks, such as Binance Smart Chain and Polygon. V3 introduced concentrated liquidity, which lets providers choose a price range for their liquidity allowing better capital efficiency. A feature to set custom fees was added.

Key features of Uniswap

Automated market maker

One of the key features of Uniswap is its use of automated market makers (AMMs). These algorithms facilitate trades between buyers and sellers by automatically setting the prices of assets based on supply and demand. 

This allows Uniswap to operate without the need for traditional order books, which are used by many centralized exchanges to match buyers and sellers.

Liquidity pools

In a practical manner all trades are conducted by utilizing the so-called liquidity pools. These pools contain a certain combination of assets, which always maintain a balanced ratio according to their relative worth in the liquidity pool.

Generally, there are two important roles while using a liquidity pool:

• Trader – uses liquidity (assets) in the pool to swap one token for another. For this transaction, a trader pays a fee, which is also calculated by the AMM.
• Liquidity provider – deposits assets to the liquidity pool, typically in a balanced proportion. Collected fees are then distributed among the liquidity providers in a form of yield.

For every exchange on Uniswap, there is a fee of 0,3 %. This fee is collected on behalf of the platform and then redistributed to the liquidity providers proportionally to their share of the liquidity pool. 

Further fees are associated with the specific blockchain and usually serve as a reward to the validators for processing transactions (gas fees).

Uniswap NFT Trading

A recent addition to the Uniswap ecosystem is their own NFT aggregator tool. This tool allows traders to source NFT inventories from many marketplaces in the Uniswap interface.

Integrated marketplaces include Foundation, Larva Labs, LooksRare, NFT20, NFTX, OpenSea, Sudoswap, and X2Y2. Uniswap also claims that users can save up to 15 % on gas fees compared to other aggregator platforms by utilizing their Universal Router smart contract.

Governance

Because of the decentralized nature of the protocol, decisions are voted on by Uniswap DAO (decentralized autonomous organization), which consists of many members across the globe. The changes are then implemented by a team of developers, according to the DAO.

Uniswap also has a unique token, called UNI, which was launched in September 2020. UNI can be used to govern the Uniswap protocol, participate in governance decisions, and access certain features on the platform.

Is Uniswap secure?

In terms of safety, Uniswap utilizes several measures to protect users and their assets. These include smart contracts, which ensure that transactions are transparent and cannot be altered once they are initiated. Smart contracts are purely code-driven and that always means a certain possibility of bugs or exploits. However, Uniswap has its code regularly audited and so far it has stood the test of time.

Uniswap also benefits from Ethereum's security features, including its proof-of-stake consensus algorithm, which helps to prevent fraud and double spending.

Additionally, Uniswap allows users to set their own gas fees. This allows users to prioritize the speed and security of their transactions based on their own preferences and needs.

Other DEX alternatives

Some of the more known alternatives for decentralized trading include:

• SushiSwap – also on Ethereum. Originally based on the Uniswap code (fork). Improved liquidity provision, the possibility of staking liquidity tokes.
• Curve – unique algorithm for trading multiple pegged assets in one pool (wBTC, stablecoins, etc.) with very low slippage.
• PancakeSwap – built on the Binance Smart chain. Similar features to Uniswap.
• Balancer – on many blockchains. Possibility of creating custom liquidity pools of many assets. User-friendly interface.

Key takeaways

• Uniswap is a DEX (decentralized exchange) that allows traders to buy and sell assets using AMMs, without the need for central authority
• Users can provide liquidity on Uniswap and earn a portion of the trading fees in a liquidity pool
• Smart contract technology allows for better security and is censorship-resistant
• UNI is a token that is used to create proposals and vote on changes for the Uniswap protocol
• Uniswap offers an in-built NFT marketplace aggregator