Uniswap (UNI): A Decentralized, Automated Liquidity Protocol for ERC-20 Token Exchange

Are you an avid cryptocurrency trader? Then you should know how time-consuming it is to trade your crypto (especially the less popular ones) on the big centralized exchanges that are constantly plagued with a myriad of issues since cryptocurrency trading became a thing. 

Well, Uniswap was created with a single goal: decentralization. With Uniswap, you can easily swap your ERC-20 tokens in minutes. 

Uniswap is a decentralized trading protocol built on the Ethereum blockchain. Going by the keyword ‘decentralized’, a decentralized exchange isn’t governed by a central authority. It doesn’t have any trusted third party acting as administrator; instead, it is governed by a community of users who collectively maintain the protocol and keep it running.

Decentralized exchanges were created to solve the inherent problems associated with centralized exchanges. Some of these issues include:

Security: One of the biggest challenges centralized exchanges face is security. Cryptocurrency exchanges are a prime target for hacking attacks, due to the ‘profit’ potential for hackers. Over the years, hackers have successfully made off with millions of dollars in cryptocurrency from top exchanges like Bithumb, Bitfinex, Bitpoint and even Binance.

  • High trading fees: Cryptocurrency exchanges charge high trading fees. This is equally a major problem users face when trading on centralized exchanges.

 

  • Mismanagement: Crypto exchanges have lost millions of dollars in cryptocurrency due to bad management. Exchanges are controlled by owners, and it only takes malicious intent for your funds to fall into the wrong hands.

 

 

  • Fraud: Some centralized exchanges are owned by shady people who have one thing in mind: stealing their users’ funds. Even worse, numerous exchange owners have been arrested and charged to court on criminal counts including fraud, money laundering and organized crime.

 

Decentralized exchanges have managed to tackle most of these problems but they still have a problem of their own: liquidity. In the context of crypto exchanges, liquidity refers to the ease with which a crypto asset can be exchanged for cash without affecting the price of that crypto asset.

Liquidity is important for so many reasons. For one, it helps to reduce volatility in a market. The more liquid a crypto market is, the more stable its price becomes. Liquidity also affects transaction time. The more liquid an exchange is, the faster trades will go through. These are some of the many reasons why a crypto exchange needs to be liquid.

Every cryptocurrency exchange needs deeper liquidity to help make trading more efficient, faster and relatively easier. Uniswap’s unique proposition is solving the long-standing liquidity problem of decentralized exchanges.

By allowing users to swap their tokens through liquidity pools, Uniswap changed the narrative of crypto trading (i.e., the conventional buy/sell order book model). Currently, Uniswap is one of the most valuable platforms in the crypto space.

uniswap.. Everything you need to know

What Is Uniswap?

Uniswap belongs to a class of blockchain-based solutions known as decentralized exchanges (DEXes), alongside Bancor, IDEX, SushiSwap, etc. At its core, Uniswap enables users to exchange their ERC-20 tokens directly on the Ethereum blockchain. Through smart contract functionality and liquidity pools, users can easily ‘swap’ (i.e., exchange) their crypto assets in a decentralized, trustless manner.

One of the amazing features of Uniswap is that you’re fully in control of your crypto assets at any time. You’re in control of your private keys and at no point in time will you rely on a third party when making crypto transactions. 

Uniswap has grown to become the number one decentralized exchange in the business and one of the most popular exchanges in the crypto space. The fact that it was launched in 2018 with no ICO says a lot about the power of this project. Who needs an ICO when you have an amazing product, right? 

Uniswap is also an open-source project. This is great for so many reasons, one of which is the ability to independently verify the robustness of the code powering the platform. 

In the first quarter of 2019, Uniswap raised seed funding from a VC company, Paradigm Ventures. This funding was geared to help them further build on an already amazing product. Since the funding, Uniswap has seen a surge in trading volumes and activity on the platform. 

This was enabled not just by the greatness of their product but the massive boom in the DeFi sector. Several DeFi projects also saw an increase in activity and experienced similar growth in the same time frame. 

As if these awesome features are not awesome enough, Uniswap released version 2.0 of this groundbreaking product in May 2020. Uniswap v2 was a massive overhaul to the Uniswap protocol, it includes new features like:

 

 

  • ERC-20 direct swaps: notably, users can now swap between two ERC-20 tokens on Uniswap v2.

 

 

 

  • Price oracles: accurate price data is a given for any decentralized exchange. Uniswap v2 now features “highly decentralized and manipulation-resistant on-chain price feeds.” 

 

 

 

  • Flash swaps: This feature allows you to withdraw as many ERC-20 tokens as you want from the platform before you pay for it.

 

You can find the full list of exciting features introduced in Uniswap v2 in the official announcement.

Uniswap’s Unique User Experience

No exchange on earth has a user interface as simple as Uniswap’s. An intuitive interface with a clean and sleek design. The interface is simple and easy to use, unlike most centralized exchanges which feature overwhelming interfaces housing various elements like trading charts, toolbars, and modals.

On the right corner of your desktop screen is a ‘UNI’ button and another button for connecting to an external wallet. 

Even everyday users who are unfamiliar with crypto trading can comfortably exchange their crypto assets, thanks to Uniswap’s simple and clutter-free design.

You can also toggle between light and dark mode, whichever fits your personality. 

How Swapping Works on Uniswap

Tokens are added to Uniswap by funding it with an equal value of ETH and the token being added for trading. When you want to create an exchange in Uniswap for a new token, you’ll first launch a new Uniswap smart contract and create a liquidity pool the worth of the token in ETH and the token to be traded.

Instead of waiting for buyers and sellers to facilitate a transaction before the price is determined for the token.

What Is a Liquidity Pool?

Liquidity pools are pools of tokens locked in a smart contract. They help facilitate trading by providing liquidity needed to enable swapping on a platform like Uniswap. 

Uniswap is different from other decentralized exchanges. The protocol employs an automated market making model known as Constant Product Market Maker to determine the price of tokens.

Any token can be put into the Uniswap protocol by backing it with an equal value of ETH and the ERC-20 token being exchanged.

For example, if you wanted to list your newly launched token, Lucky Token on Uniswap, you would initiate a fresh Uniswap smart contract and create a liquidity pool with, say, $50 worth of Lucky Token and $50 worth of ETH.

Price Chart of UNI

Uniswap launched its governance token UNI in September of 2020 with an airdrop that saw loyal users rewarded with 400 UNI. A total of 150 million UNI tokens were airdropped. 

At the time of reporting, UNI trades at $3.59 per token with a total supply of 1,000,000,000 UNI. Right now, we have roughly 200,000,000 UNI in circulation. 

UNI has a market cap of $771,237,920 and total value locked (TVL) stands at $1,556,962,041. 

According to Coingecko, the 24-hour trading volume is $431,981,777 at the time of writing.  

Who Are the Creators of Uniswap?

The Uniswap DEX protocol was created by Hayden Adams in November 2018. According to Adams, he was inspired to create the protocol after reading a post on automated market makers written by Ethereum co-founder Vitalik Buterin.

Before he created Uniswap, he was an engineering intern at Vista Wearable and worked as a Researcher at the Columbia University Medical Center and an engineer at Siemens.

Besides Adams, the team is made up of experienced members like Aseem Sood, who’s also the founder of @opencollective. He has worked as an engineer for both Google and Dropbox. Engineering lead Noah Zinsmeister is a full-stack engineer with extensive blockchain knowledge. 

Other team members include Callil Capuozzo who works as Design Lead, senior software engineer Moody Salem who has previously worked with Google and AWS. Ashleigh Schap works in an advisory role.

Conclusion 

Uniswap has transformed the decentralized exchange industry. The innovative trading mechanism made them more popular because they solved a vital problem that plagued decentralized exchanges. Before Uniswap, selling your ERC-20 tokens was always an uphill task, but now you can simply swap them to any currency of your choice with the click of a button. 

Comments (No)

Leave a Reply