What is Uniswap? (UNI)
The Beginner’s Guide
Uniswap is a blockchain protocol running on Ethereum that seeks to incentivize a global network of users to maintain an exchange where cryptocurrencies can be bought and sold by traders.
- Check the Uniswap price page for more details on the current UNI value, trends, and price history.
One of an emerging number of decentralized finance (DeFi) protocols, Uniswap leverages multiple crypto assets, including its native UNI cryptocurrency, to provide a service similar to a traditional exchange. The difference is Uniswap has no one central operator or administrator.
Rather than maintaining a central order book where buyers and sellers can place orders, Uniswap instead uses a collection of liquidity pools.
Similar to protocols like Balancer and Curve, liquidity providers contribute to Uniswap pools by first locking two assets into a smart contract. For example, Uniswap’s DAI/ETH liquidity pool consists of equal values of DAI and ETH deposits.
In exchange for maintaining liquidity in these pools, providers are then rewarded with a portion of the trading fees, along with newly minted UNI cryptocurrency.
Deposits in these pools are essential to Uniswap’s operations, as users can then buy and sell cryptocurrencies from the liquidity pool, swapping out one token for another.
Anyone can list a token on Uniswap, as long as there is a liquidity pool for traders. However, Uniswap is built on Ethereum, meaning it does not list tokens trading on other blockchains.
Users seeking to stay connected on the current development status of Uniswap can follow its official blog for up-to-date details.
Who Created Uniswap?
Uniswap was released in 2018 by founder Hayden Adams. In 2020, Uniswap v2 launched, enabling direct swaps between any token on Ethereum.
Uniswap’s September 2020 token launch saw the protocol airdrop 400 UNI tokens to anyone who had completed a transaction on the network prior to September 1 of that year.
Additionally, some users received more tokens based on the amount of liquidity they had provided to the protocol.
How Does Uniswap Work?
Uniswap’s network is designed to facilitate the buying and selling of crypto assets in a way that mirrors a traditional exchange.
It does this by maintaining smart contracts in which users can deposit crypto assets that can be programmatically accessed by traders. Uses who trade against assets in the pool pay a fee that is then distributed to all liquidity providers proportionally, based on their contribution to the pool.
Uniswap’s liquidity pools
Each Uniswap pool holds two tokens, which together represent a trading pair for those assets.
Uniswap uses the formula (x * y = k) to determine pricing for the pair. In this formula, x and y represent the pool balance of each token, and k is the total, constant price of said pool.
In a newly created liquidity pool, the first liquidity provider sets the initial price of the assets in the pool by supplying an equal value of both tokens.
Buyers can then swap tokens within the pool based on the formula. Smart contracts running the protocol use the formula to take the amount of tokens from the buyer and send an equivalent amount of tokens back, keeping the total pool price constant.
Of note, each trade has an associated fee with it, meaning that the total liquidity in a pool increases slightly with every trade, making the system profitable for liquidity providers.
As a result of this price shift, if another buyer makes a trade in the same direction, they will get a slightly worse rate for their trade, helping keep the overall system in balance.
Why does UNI have value?
Uniswap’s cryptocurrency, UNI, plays a key role in maintaining and operating its network.
Users who hold UNI help govern the protocol, voting on proposals that might further Uniswap’s development and improve its ecosystem.
The Uniswap team created UNI with the idea that the protocol would be owned and operated by its users, who will, in turn, help it to grow into a self-sustainable model.
Uniswap delivered on that vision when it sent 400 UNI to every user on September 1st, 2020. Furthermore, it rewarded the users who had contributed to liquidity pools with additional tokens.
Of note, users who want to submit proposals to the Uniswap network are required to own a minimum of 1% of the total UNI supply.
Why use Uniswap?
Traders may find Uniswap appealing based on its ability to provide access to newer and less liquid cryptocurrencies not available on more traditional exchanges.
When used in conjunction with an exchange like Kraken, users may also be able to spot arbitrage opportunities in pools that experience a price slippage due to large transactions.
Further, Uniswap may also be of interest to investors who seek to access a wide range of projects built on the Ethereum blockchain.
To date, there are a variety of wallets that have already integrated Uniswap to allow users to trade cryptocurrencies within their ecosystem.