What is Uniswap? Exploring the World’s Largest Decentralized Exchange

You keep possession of them in your own crypto wallet, which means you’re ultimately the one responsible for safely storing your cryptocurrency. While Uniswap developed a reputation for costly gas fees, this isn’t always the case. You can see how much a transaction will cost in network fees when you use Uniswap’s trade tool. Because of Ethereum’s popularity, there have been periods of high network congestion. That congestion drives up gas fees and can make it very expensive to use anything built on Ethereum, like the Uniswap exchange. In September 2020, Uniswap introduced its governance token called UNI by airdropping 400 UNI (worth ~$1000 at the time) to every wallet that had in any way interacted with the protocol before September 1, 2020.

• Whenever new ETH/ERC20 tokens are contributed to a Uniswap liquidity pool, the contributor receives a “pool token”, which is also an ERC20 token.
• It’s worth noting that this model does not scale in a linear fashion.
• Uniswap Labs is a company that develops software products that work on top of the Uniswap Protocol.
• Ultimately, “hooks” would offer developers significant flexibility to create liquidity pools customized to suit specific needs.

None of the content on CoinCentral is investment advice nor is it a replacement for advice from a certified financial planner. A pop-up side window containing the transaction details will open when you do this, asking you to confirm the transaction. The first step in the process is to connect your wallet with Uniswap by clicking on the “Connect wallet” button on the interface’s top right corner. The project was kickstarted with a $100,000 grant from the Ethereum Foundation and subsequently backed by several renowned venture capital funds, including Andreessen Horowitz (a16z) and Union Square Ventures.

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Uniswap is an example of one of the core products in the DeFi ecosystem, the decentralized crypto exchange, or DEX. DEXs aim to solve many of the problems of their centralized counterparts, including the risk of hacking, mismanagement, and arbitrary fees. However, decentralized exchanges have their own problems, mainly lack of liquidity—which means a lack of amount of money sloshing around an exchange that makes trading faster and more efficient. They do this until the price of the token rebalances in line with the price on other exchanges and there is no more profit to be made.

Meanwhile, Uniswap’s V3 deployment became necessary following the high gas fees the Ethereum network charged at the time. Over the years, the Uniswap protocol has introduced various iterations of its decentralized trading services. This is to improve the open-source dApp software and cater to the growing demands of the crypto market. Also, due to Uniswap’s open-source and decentralized nature, there is no central entity controlling or profiting from the protocol. Instead, it’s maintained and improved by a community of developers and its governance, both of whom contribute to its progress. At the time of Alice’s deposit, the price of 1 ETH was 100 USDT, which means her deposit was $200 (1 ETH x $100 + 100 USDT).

Uniswap employs an innovative AMM model, which uses liquidity pools instead of traditional order books to enable seamless trading. Users can provide liquidity to these pools by depositing an equal value of both tokens in the pair. A Constant Product Market Maker (CPMM) model is used to determine the price of assets in a liquidity pool.

How Uniswap Works: Centralized vs Decentralized Exchanges

You’ll then need to confirm the trade by clicking “Swap” and approving the Ethereum wallet transaction. Whereas Uniswap uses the Ethereum platform, PancakeSwap uses the Binance Smart Chain. The platform also found itself at the center of the recent Unisocks (SOCKS) craze, a token backed by a physical pair of socks.

• For example, if you’ve contributed 5% of the total liquidity in the ETH-USDC pool, you’ll get 5% of the total fees generated by the same pool.
• The primary purpose of the UNI token is to decentralize Uniswap’s governance.
• AMMs use a mathematical algorithm to determine the price based on the supply of the asset, which removes the friction of having centralized middlemen and allows for an efficient way to buy and sell digital assets.
• This will provide important gas savings because swaps will no longer need to transfer tokens between pools held in different contracts.

However, the most popular trading pairs are the USDC and Wrapped Bitcoin (WBTC) digital assets. Uniswap went live on the BNB chain after receiving 66% support from governance voters. This move can potentially provide users with more efficient and cost-effective trading options. It also means Uniswap users will be able to take advantage of BNB Chain’s high speed and low transaction fees.

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You won’t find an APR for any of Uniswap’s liquidity pools in the app. Other popular AMMs, including SushiSwap and PancakeSwap, list the current APRs for all their liquidity pools. Although these rates can and do change often, they https://1investing.in/ at least give you an idea of which pools are paying the most. You could deposit equal amounts of each crypto to Uniswap’s USDC/ETH liquidity pool. Then, you’d earn crypto every time someone swaps USD Coin and Ethereum on Uniswap.

So let’s say Alice buys 1 ETH for 300 USDT using the ETH/USDT liquidity pool. In doing so, she increases the USDT portion and decreases the ETH portion of the pool. Uniswap Governance offers grant funding for people who are building apps, tools, and activities for Uniswap Protocol users, builders, and community members.

But Uniswap’s position as one of the leading DEXs has given it considerable clout. Some are looking to leverage that as the DeFi sector grows—and, inevitably, comes under the gaze of regulators. In May 2021, members of the Uniswap community launched a governance proposal to set up a “political defense” fund with a budget of 1-1.5 million UNI. Uniswap’s token launch can be considered a response to the rise of SushiSwap, a clone of the protocol that added a token to encourage usage. In a more direct challenge, SushiSwap also tried to drain Uniswap of liquidity through a process called “vampire mining”. Through Uniswap, you’re able to purchase ether (ETH) and any of the thousands of ERC20 tokens supported by the platform.

Bitcoin USD

The token they received which keeps a record of what stake they’re owed is then destroyed. Order book-based trading is where buy and sell orders are presented in a list along with the total amount placed in each order. In Uniswap V3,  a new contract was deployed for every liquidity pool, making creating pools and performing multi-pool swaps more expensive. Initially inspired by Ethereum co-founder Vitalik Buterin’s concept of an on-chain automated market maker, Uniswap was created by Ethereum developer Hayden Adams in 2018.

It was designed with simplicity in mind but still allowed users to trade any ERC-20 token on the Ethereum blockchain. The protocol gained popularity among the Ethereum community and worked as a proof of concept for AMM based decentralized exchanges. Centralized exchanges (CEXs) have been the backbone of the cryptocurrency market for years due to their deep liquidity, faster transactions, fiat on-ramps and customer support. However, decentralized exchanges (DEXs) are gaining dun and bradstreet report meaning popularity as users are attracted by the lower trading fees, security, privacy and accessibility. One month before UNI tokens launched, SushiSwap – a fork of Uniswap – had incentivized users from Uniswap to allow SushiSwap to reallocate their funds to the new platform by rewarding them with SUSHI tokens. This was a new type of token that gave users governance rights over the new protocol as well as a proportionate amount of all transaction fees paid to the platform.

Uniswap (UNI): What it is, Pros and Cons, FAQs

These NFTs can be traded between wallets and holders can always collect position fees. It’s basically a digital image that displays essential information, such as the token pair and a curve representing the position’s “steepness”. Each Uniswap v3 position also has a unique color scheme, and different pools are represented by different color variations.

The new features and optimizations set the stage for exponential growth in AMM adoption and made Uniswap one of the largest cryptocurrency spot exchanges. Uniswap is trying to solve decentralized exchanges’ liquidity problem, by allowing the exchange to swap tokens without relying on buyers and sellers creating that liquidity. 10 years ago, if someone told you to go to a place called Uniswap or Pancakeswap or Sushiswap in order to exchange money, you would have dismissed it as a scam.

Trading or swapping between ERC20 tokens on Uniswap is as simple as it gets. All you need is a cryptocurrency wallet like Metamask or a Ledger and some ERC20 tokens in it. With its strong start and continued prominence, the platform appears poised to serve as a central hub for decentralized trades on the Ethereum blockchain in the coming years. The foremost smart contract network relied on the proof-of-work (PoW) consensus mechanism to validate its transactions.

Wrapped Bitcoin (WBTC) is an ERC20 token backed by Bitcoin and designed to mimic its value. It supports many of the most popular crypto wallets, including Trust Wallet, MetaMask, and Coinbase Wallet, among others. Unfortunately, this makes Uniswap virtually unusable for smaller or sub $1000 transactions, and even then, the fees are still incredibly costly. Hopefully, Ethereum 2.0 will roll out soon enough with a much-improved transaction throughput and make on-chain microtransactions possible again. The USDC will arrive directly in your wallet as soon as the miners verify the transaction on the Ethereum blockchain.

Native ETH trading pairs

LPs in these pools provide liquidity for a price curve between 0 and infinity, which means the capital provided by LPs in an AMM is evenly distributed across all price ranges. This means only a portion of the liquidity in the pool sits where most of the trading is taking place. However, it doesn’t make much sense to provide liquidity in a price range that is far from the current price or will never be reached. Users could also trade between the tokens without the need for intermediate conversion to ETH. In short, Uniswap v2 permitted liquidity pools consisting of any two ERC-20 tokens instead of needing to have ETH alongside one ERC-20 token.

DEXs offer unique benefits that can make them a compelling alternative to CEX. Created by Hayden Adams in 2018, its implementation was inspired by the underlying technology first described by Ethereum co-founder Vitalik Buterin. Uniswap pioneered the Automated Market Maker (AMM) model and played a crucial role in the invention and development of DEXs. Today, Uniswap continues to be one of the most user-friendly DEXs available, with substantial liquidity and an extensive selection of token listings. Once you’ve connected your wallet, you can choose the tokens you want to trade. You can select from a wide range of tokens, either by navigating to the token details page, or entering the token directly.

The Uniswap platform enables users to trade cryptocurrencies without any involvement with a centralized third party. Once a token has its own exchange smart contract and liquidity pool, anyone can trade the token or contribute to the liquidity pool while earning a liquidity provider fee of 0.3%. To contribute to a liquidity pool, you need an equal value of ETH and ERC20 tokens. The Uniswap protocol also has a built-in incentive for users to provide liquidity. Uniswap has a 0.3% fee (there are two tiers available too) for crypto swaps. To provide liquidity to a pool, a user must deposit an equal value of both tokens into the pool.