Uniswap is an Ethereum-based automated market maker protocol that facilitates trades without the need for a centralized administrator. Uniswap distinguishes itself from other crypto exchange platforms by being completely decentralized and maintains liquidity by incentivizing users to contribute their assets to liquidity pools.
Uniswap was developed by Hayden Adams who was inspired by a post from Ethereum-creator Vitalik Buterin encouraging a new, innovative approach to the liquidity challenges of money markets. Drawing on a background in computational engineering, Adams began developing Uniswap in 2017, and launched the platform’s mainnet in November 2018. Uniswap V2 launched two years later in 2020 along with the network’s native governance token, UNI, launching in September. 400 UNI tokens were airdropped to any users that had used the network to complete a transaction before September that year.
While other crypto money markets rely on centralized controls or administrators and order book systems that match buyers to sellers, Uniswap distinguishes itself by offering users a fully decentralized trading platform that addresses the prevalent liquidity challenges of the sector. Uniswap facilitates trades through automated liquidity pools: users deposit their crypto assets into collectivized fund pools (each type of crypto asset that the Uniswap platform supports has its own pool) and trading prices are set according to an algorithm.
Uniswap’s liquidity pool system means that buyers and sellers don’t have to wait for a corresponding party to initiate a transaction: liquidity providers deposit assets to pools and buyers and sellers can trade against these collective pools.
Incentivising liquidity: Liquidity pool trading is predicated on having enough assets in each pool in order to facilitate instant trades. Uniswap addresses this requirement by incentivising users to deposit assets and provide liquidity: when liquidity providers deposit crypto funds into a pool, they receive a ‘liquidity token’ proportionate to the amount of value they contributed. When users remove their stake from the pool, they can redeem the tokens for their proportional share of the pool. Once they are redeemed, liquidity tokens are automatically destroyed.
Uniswap charges a 0.30% fee on every trade that takes place on the platform: under Uniswap V2 (introduced in May 2020), a community-authorised option to reroute 0.05% as a protocol charge was implemented.
Determining prices: The price of tokens in the Uniswap liquidity pools is determined algorithmically and based on supply and demand. Unlike an order book trade system which determines prices based on what sellers and buyers are willing to accept and pay, the Uniswap automated market maker adjusts prices depending on how much of each token in a trading pair a pool holds. Essentially, if a pool holds more of a particular token, the algorithm decreases its price – if it holds less of the token, it increases the price.
Governance token: The UNI token is Uniswap’s governance token. Anyone that holds UNI can vote on Uniswap governance proposals, while anyone that holds at least 1% of the total supply of UNI can introduce new proposals for a vote. 1 billion UNI tokens will eventually be released into circulation.
As an automated money market, Uniswap is used to facilitate cryptocurrency trades for users around the world. As of Q1 2021, the platform had handled over $200 billion in trading volume and over 40 million trades. Traders may seek to purchase cryptocurrency for speculative purposes or to use in other applications deployed on the Ethereum network.
Arbitrage trading is very common on the Uniswap platform. Arbitrage traders analyse multiple cryptocurrency trading platforms in order to find price discrepancies and then trade between platforms for profit until the price difference is eliminated. Uniswap has deployed a range of applications targeted at arbitrage traders, including analytics tools and token lists.
Uniswap is integrated into a variety of projects within the Ethereum ecosystem, including:
- DeFi projects: Uniswap is open source meaning that the development community is able to build a range of platform-specific DeFi tools, including APIs, wallets, and protocols, that expand the network’s functionality.
- Decentralized aggregators: Uniswap provides liquidity for a wide range of DEX aggregator platforms that help traders find the best prices.
- Smart contracts: Developers can use the open source Uniswap code to deploy a range of experimental ideas. Examples include the Unisocks sales portal and the Zora art platform.
In March 2021, Uniswap released a preview of Uniswap version 3 with an anticipated launch date on the Ethereum mainnet of May 5. Uniswap set out a range of key features and functionalities that Uniswap V3 would introduce, including:
- Concentrated liquidity: Uniswap V3 will allow liquidity providers greater control of the price range of their deposited assets.
- Fee tiers: Liquidity providers will be compensated more appropriately for the level of risk they take on with fee tiers set at 0.05%, 0.30%, and 1.00%.
- Oracle integration: Uniswap V3’s oracles will be lower cost, easier to integrate, and enable time-weighted average prices (TWAP) that remove the need to record historical token values. The updated oracles will allow for the calculation of any TWAP within the past 9 days.
- Gas cost: The cost of processing swaps on the Ethereum mainnet net will be cheaper under Uniswap V3.
In addition to the V3 launch, Uniswap’s roadmap includes achieving lower latency trades, faster settlements, and cheaper transaction costs. Uniswap has also placed an emphasis on governance as part of its long-term success and has announced plans to have its core team members ‘participate more directly’ in platform governance, including advocating for and against community proposals.
- What is Uniswap?