Uniswap is a decentralized exchange protocol (DEX) that has taken an enormous role in the crypto world due to its particular operating system. A fact that has led it to constant growth and to become one of the largest DEX in the world.
Unot of decentralized exchange protocols (DEX) most famous that operate in the blockchain de Ethereum it is currently Uniswap. But, Uniswap is much more than a DEX, in fact this protocol provides many other additional functions for users of DeFi on Ethereum. It even recently launched its governance token called UNI with which it seeks to boost growth and interest in the platform. That is why Uniswap has become one of the most used platforms in this ecosystem today.
In this chapter you will learn about Uniswap, its operation and characteristics in detail. So you can contemplate everything that this formidable protocol can offer you DeFi.
Uniswap, the origin
Uniswap was born as a project designed to offer two functions: first, to serve as DEX within the Ethereum ecosystem. And secondly, offer an automated liquidity protocol (automated market maker or AMM).
The fact that Uniswap relied on Ethereum and its smart contacts to achieve its objectives guaranteed the absence of any type of centralization for its operation. In addition, it was integrated with the large number of tokens ERC-20 existing.
In short, Uniswap had become a completely autonomous system guided by only one thing: its own programming, which is transparent and immutable.
The beginnings of the project are quite unique because it all started with a series of posts created by Vitalik Buterin in 2017. The first of them it was on reddit, where Buterin envisioned the ability to create DEX on Ethereum. In fact, this first post was the trigger for several projects of this type. Later in March 2018, Buterin again flaunted his knowledge in another post aimed at decentralized market makers. In this point, Hayden Adams published your idea, showing what your first contract for Uniswap.
Since then, Uniswap has been a project in constant evolution and development, which has led it to become one of the largest DeFi systems today.
How does Uniswap work?
The operation of Uniswap focuses on two points: first, provide a decentralized medium of exchange (DEX) to its users, And in second place, provide a means to create an automated liquidity protocol (AMM).
In the first case, Uniswap works just like the exchanges we are used to using. That is, we request a change from one currency to another, and this change is made by the platform, in this case in a completely decentralized way. The positive thing about Uniswap at this point is that the control of the funds is always in the hands of the user (similar to the 0x protocol), and the second thing is that due to the large user base and liquidity providers (LP) of the platform, there is always a quick response for exchanges.
However, in this second aspect there is an important change with respect to other AMM platforms, and that is that Uniswap works under a design called Constant Product Market Maker (CPMM). What this operating model does is create liquidity reserves (or liquidity pools) with which traders can quickly negotiate.
Yes, we are talking about liquidity pools that are maintained by users who want to take this role, who are encouraged to invest in these pools in order to obtain commissions for their participation in them. This point is what has made Uniswap an interesting platform for users, since the injection of liquidity means more profits, and has given rise to another phenomenon, the liquidity mining or liquidity mining.
Creating markets and profits
The objective of this operation is clear: to create large pools of cryptocurrencies ready to be exchanged, and as a result generate profits for the liquidity providers and the platform as such. In addition, these pools are configured in such a way that liquidity providers have to deposit the tokens in them. Typically these tokens are ETH or some ERC-20 token supported by the platform, including stablecoins. The idea behind this is to create a balanced liquidity system that allows the creation of exchange options that interest liquidity providers and users of the platform.
For example, if liquidity providers create a DAI / ETH pool, they must enter value in ETH and DAI. Once the pool is created, it will appear listed in Uniswap and users will be able to request exchanges in it.
For example: if Maria wants to exchange her 100 DAIs for ETH, all she will have to do is go to the DAI / ETH pool, make an exchange request and wait for it to be processed. The result is that the DAI / ETH pool will take Maria's 100 DAI and send her $ 100 in ETH. In the end, this change will be reflected in the liquidity of the ETH / DAI pool, since it has gained 100 DAI and lost $ 100 in ETH. However, María will receive the total minus the service commission, which remains in Uniswap and is distributed among the liquidity generators.
Price control system and pool creation
However, in Uniswap it is important to consider some situations. First of all, any token can be listed in Uniswap. To do this, all you need is to create an exchange pair together with its respective pool and add liquidity. So for example, we may be able to create our $ MONEY token (this is a fictitious token) and list it in Uniswap by creating a $ MONEY / ETH pool. At this point, what we must do is add liquidity, which in this case could be $ 20 in the $ MONEY token and $ 20 in ETH. With this we will have created a pool ready to operate in Uniswap.
Who determines the exchange price?
The purchase and sale price is determined by the software, the smart contract itself determines it. To do this, use this constant equation:
x * y = k.
Here the x and y refer to the number of ETH and ERC-20 tokens within the pool, and k is a constant value. This equation uses the balance between ETH and ERC-20 tokens, and supply and demand, to determine the price of a particular token.
Every time someone buys $ MONEY with ETH, the supply of $ MONEY decreases while the supply of ETH increases, which in the end results in an increase in the price of $ MONEY.
As a result, the price of tokens on Uniswap can only change if exchanges are made. Basically what Uniswap is doing is balancing the value of the tokens and exchanging them based on how many people want to buy and sell them.
Additionally, this also helps no pool run out of liquidity at some point. The reason is that this price balance always seeks to offer the best exchange price in the pools, allowing all of them to have participation levels within the exchange according to the interest shown by users and providers in their use.
Generating pool tokens
Another important point in the operation of Uniswap is the generation of the token pools. First of all, you should keep in mind that whenever new tokens are injected into a Uniswap liquidity pool, the liquidity provider (LP) receives a “token pool” which is also an ERC-20 token.
This means that the token pools are created each time funds are deposited in the liquidity pool and, as ERC-20 tokens, the token pools can be freely exchanged, moved and used in other dApps. When the funds are recovered, the pool tokens are burned or destroyed.
What profit does Uniswap distribute in exchange for the Pool tokens?
Each pool token received represents the user's share of the group's total assets and the share of the 0,3% trading commission of the group or liquidity pool in which it participates. Simply put, the pool token is the means by which LPs receive their rewards within Uniswap.
When a user wishes to withdraw their benefits, they must transfer their pool tokens to the pool's smart contract, receiving their share of the 0.3% of commissions that the pool has collected.
Uniswap V3, protocol improvement and future vision
Although Uniswap is a great protocol, it was born with a particularity: the need to use wETH (Wrapped ETH) for its operations, as was the case with the protocol 0x. wETH acted as a bridge to be able to use Uniswap, however, its use made the use of the system more complex and made it more expensive. An issue that was fixed with the release of Uniswap V2, the second version of the protocol. Uniswap V2 had its most relevant update with creating your UNI token, the network governance token.
But in May 2021, Uniswap V3 was released, taking DEX to another level, adding a host of new features. The first is concentrated liquidity, which allows liquidity providers to allocate liquidity within a customized price range. This, in turn, means that traders don't have to put as much capital into play to get results.
On the other hand, V3 has also added more levels of commissions, which allows users to better determine their level of risk when trading volatile assets, that is, those that can change in price between the time it starts and the time it ends. execute an operation. The update has also incorporated “easier and cheaper” oracles, which ensure that DEX price data stays up to date.
Uniswap V3 has also provided the platform with the ability to generate non-fungible tokens (NFTs) based on LP positions, turning them into “on-chain generated art”.
The UNI token, a token for Uniswap's decentralized governance
The launch of the UNI token was carried out on September 16, 2020, and it was distributed through an airdrop following these parameters:
Creation of 1.000 million UNI in its genesis issue, available over the course of 4 years. The initial allocation during these four years is as follows:
- 60,00% for members of the Uniswap community (600.000.000 UNI)
- 21,51% for team members and future employees with award of 4 years (215,101,000 UNI)
- 17,80% for investors entitled to 4 years (178.000.000 UNI)
- .069% for consultants with vested rights over 4 years (6,899,000 UNI)
- A perpetual inflation rate of 2% per annum will commence after 4 years, ensuring continued participation and contribution to Uniswap at the expense of UNI's passive holders.
In addition, anyone who had used Uniswap prior to the launch of their UNI token could claim 400 UNI tokens, which meant that many people were enabled to claim the equivalent of $ 1.000 USD in tokens on their first day of launch, which triggered the use of the platform. You know what you can buy your UNI directly in Bit2Me?
Reaching the giants and pushing Ethereum to the limit
Another important point of Uniswap is that it has been able to break some records within the crypto world. First of all, it has become one of the most widely used decentralized exchanges. On September 1, 2020, Uniswap surpassed $ XNUMX billion in trading volume within the platform for the first time. Uniswap then reached a higher volume than the centralized exchange Coinbase, which made the potential of this platform very clear.
The pace of operations within Uniswap was maintained for five consecutive days, exceeding an average of $ 600 million. This, however, led to new levels of saturation in the Ethereum network, which had a broad impact on the transactions of the rest of the applications based on this blockchain.
Pros and cons of Uniswap
Pros
- It is a completely decentralized system.
- Access to the protocol can be done using any web3 wallet (MetaMask) and create custom applications on them.
- Possibility of creating an exchange for any ERC-20 token.
- It is a non-profit project and completely open-source.
- The operation within the platform is economical.
- Liquidity pools offer good profit levels for their providers.
Cons
- The gas usage of the platform is high. Given Ethereum's current scalability problems, fees for the system and its operations on the blockchain turn out to be quite expensive.
- Uniswap is highly experimental like almost all DeFi technology. Because of this, you must be aware that anything can go wrong, and there is a high risk of losing your money if you do not know what you are doing.
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