Uniswap (UNI) – decentralized token swaps on Ethereum

When it comes to trading cryptocurrencies, centralized cryptocurrency exchanges (CEXs) are the most popular option for most users as for a small fee, they can provide readily available liquidity, real-time market charts and indicators as well as security measures in compliance with KYC (know-your-customer) laws.

But for those who prefer the anonymity of direct peer-to-peer (P2P) transactions, or for those who want to trade less popular tokens not yet listed in major CEXs, a popular alternative is with the use of decentralized exchanges (DEXs) such as Uniswap (UNI). 

Uniswap is an Ethereum-powered platform that enables the exchange of ERC-20 tokens. As a DEX, users can engage in permissionless transactions with one another through smart contracts and an automated market maker (AMM) protocol. 

An AMM-powered exchange allows users to automatically execute transactions without having to rely on buy and sell orders, which are normally found on CEXs. Instead of an order book, token supply is aggregated in liquidity pools, ensuring that crypto owners can engage in transactions on the exchange at whatever time of day without a third party.

According to recent data, Uniswap is the fourth most active decentralized finance (DeFi) platform with around $4.6 billion total value locked (TVL) in its protocol as of November 2022. 

Centralized exchanges facilitate buy and sell orders through an order book system. The order book’s algorithm matches buyers and sellers that set equal or compatible prices for the asset to be traded. Sometimes, it takes a while for these matches to be found and it may sometimes even result in the forfeiture of certain orders if there is not enough trading going on. 

But unlike centralized exchanges, a DEX like Uniswap is run by smart contracts that execute permissionless trades without the need of an intermediary or third party. A DEX also allows users to initiate trades directly from their wallets without the need to set up user accounts or to provide initial deposits.

Furthermore, the liquidity of centralized exchanges relies on the volume of orders that are being made on the platform. In contrast, the liquidity of the DEX is aggregated through liquidity pools, which anyone can participate in as a liquidity provider and earn passive income through a portion of the transaction fees charged from every trade. 

To participate as a liquidity provider, a user only needs to supply two token quantities of relatively equal market value, such as $100 worth of Ethereum (ETH) paired with $100 worth of Tether (USDT) or any other ERC-20 pair. The contribution is then pooled together in the ETH/USDT pool along with the tokens from other liquidity providers. Having made a contribution to the pool, the user is now entitled to receive a portion of the transaction fees every time someone makes a trade between ETH and USDT, proportional to the percentage of the contribution to the overall supply.    

UNI is the reward token for providing liquidity to the Uniswap DEX, which users can then sell or trade as with any other cryptocurrency. Alternatively, UNI holders can also use their tokens to cast votes on the platform’s future development such as updates and treasury allocations.

Part of why Uniswap is so popular is that it is an open-source protocol which allows the general public to freely use the network’s code to create similar projects of their own. This is the reason why there are a number of different DEXs that have emerged over the years that bear a resemblance to Uniswap, most notable among them–Sushi (SUSHI), which is in fact, a hard fork of Uniswap. 

Uniswap is currently running on its latest version, Uniswap v3, which was launched in May  2021. One of the major features that are new to this latest version of Uniswap is concentrated liquidity, wherein liquidity providers are able to build unique price curves that are personalized to their own preferences.

Another added feature of Uniswap v3 is that it offers flexible fees. In Uniswap v1, transactions had a flat fee of 0.3% to fund the rewarding of liquidity providers. In v2, 0.05% of the total fee went toward the development of the network. V3 now has more variable fees, such as for stablecoin pools which now have a fee of 0.05%, standard pools with 0.3%, and non-correlated pools with a 1% fee, offering more options for users to strategize their earnings. 

UNI has a total supply of 1 billion tokens of which 762 million are already in circulation for a market capitalization of $4.97 billion as of November 2022. Once fully diluted, a “perpetual inflation rate” of 2% will be introduced to ensure network participation and longevity. 

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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.