What is Uniswap (UNI)?

Uniswap is a decentralized crypto exchange (DEX) that uses an automated market-maker system (AMM) and liquidity pools to enable traders to swap tokens.

Uniswap aims to provide similar trading services to traditional exchanges (like Kraken) by relying on a collection of liquidity pools rather than an order book that matches buyers and sellers.

Uniswap was the first DEX to implement the AMM model for its decentralized trading function. In AMMs, users provide liquidity by depositing crypto assets into Uniswap’s paired liquid pools. These pools then facilitate seamless token swaps, offering users a decentralized trading experience with benefits such as low fees, fast transactions and trustless execution.

Uniswap’s native utility token, UNI, is classified as a financial token. These projects focus on offering tools for managing and exchanging assets within the crypto ecosystem, and other DeFi functions. UNI is an ERC-20 token specifically used for voting on governance decisions, and helping influence the protocol's future and development.

Kraken offers the ERC-20 UNI token as well as 250+ other types of cryptocurrencies.

Uniswap was one of the first fully on-chain alternatives to centralized crypto exchanges.

Unlike centralized exchanges, DEX users automatically retain full custody of their assets rather than putting them in the custody of the exchange.

The main components of Uniswap are:

• Automated Market Maker (AMM): Allows for automatic trading using liquidity pools rather than traditional order books.

• Liquidity Pools: Users supply assets to pools and earn fees based on trading volume.

• Governance: UNI token holders vote on key protocol decisions, ensuring decentralized control.

• Flash Swaps: Users can withdraw tokens without upfront capital, provided liquidity is returned to the pool within one transaction block.

Uniswap's key innovation lies in its AMM system, which allows for decentralized token swaps without the need for traditional order books.

Automated Market Maker (AMM)

Uniswap uses smart contracts to create its AMM. Rather than swapping with other traders, AMM users trade against liquidity pools that contain paired crypto assets. There are several components that enable the system to work:

Liquidity providers deposit crypto assets into pools to earn fees, and traders swap tokens within these pools, paying a small fee for the service.

To maintain a balanced value within each pool, token prices automatically adjust with every swap thanks to the Constant Product Formula. The formula states that the balance of “token x” multiplied by the balance of “token y” is a constant “k” (x * y = k).

Oracles

Uniswap ensures accurate pricing for digital assets through oracles, a technology that bridges smart contracts with external data sources.

Uniswap v3 introduced time-weighted average price (TWAP) oracles, which store historical price data to maintain pricing accuracy. Further improvements in Uniswap v3 made this TWAP oracle data more accessible and cost-effective.

NFT Trading

In 2022, Uniswap acquired Genie, the first NFT marketplace aggregator, to expand its capabilities to include NFT trading. This enables the DEX to become a more comprehensive platform for both fungible and non-fungible assets.

Uniswap addresses certain issues faced by centralized exchanges, such as security vulnerabilities and the lack of liquidity for certain assets.

By decentralizing the exchange process, Uniswap offers a more secure, transparent, and accessible platform for trading cryptocurrencies. It eliminates intermediaries, reduces counterparty risks, and provides open access to financial services, especially for those underserved by the traditional banking system. 

Further, Uniswap’s AMM model also solves the issue of liquidity in decentralized trading environments by incentivizing users to become liquidity providers.

Someone may wish to purchase UNI for the following reasons:

• Participate in protocol governance: UNI is used to empower the community to actively participate in the decision-making process of its protocols, ensuring a more democratic and inclusive approach to project management. 

• Use in liquidity pools: Any digital asset investor can become a liquidity provider by depositing their tokens into liquidity pools. In return, they can earn fees from trades made against the pool .

Hayden Adams launched Uniswap in the US on November 2, 2018. 

Hayden Adams

• Title: Founder of Uniswap

• Professional Background/Qualifications: Hayden’s career began in 2016 in the field of engineering. Later, he would hold several positions in software engineering before designing and creating Uniswap

• Key Contributions: Inspired by Vitalik’s work in the field of on-chain trading, Hayden created Uniswap to demonstrate the AMM concept. Uniswap proved a success and Adams quickly became a pivotal DeFi figure.

UNI was originally created as an ERC-20 token on Ethereum with a maximum supply of 1,000,000,000 UNI tokens. 

The initial supply of 1,000,000,000 UNI was distributed as follows:

• 45% – 450,000,000 UNI – Governance.

• 21.51% – 215,110,000 UNI – Team.

• 17.8% – 178,000,000 UNI – Investors.

• 15% – 150,000,000 UNI – Community Token Distribution (Airdrop).

• 0.69% – 6,900,000 UNI – Advisors.

Uniswap was distributed to early users and liquidity providers via an airdrop. Every wallet that interacted with Uniswap prior to the airdrop snapshot was sent 400 UNI tokens.

The governance treasury received a large share to fund development and grants, with UNI holders voting on the fund’s use. This system doesn't rely on block rewards, instead, the community can propose changes, including potential new distributions, ensuring flexibility to meet future needs.

Setting a fixed supply with a predetermined distribution plan aims to keep the allocation fair and maintain the token's value by preventing inflation.

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