🤔 What is Uniswap?
Uniswap is a decentralized exchange(DEX) built on Etherium, which facilitates exchange of Etherium based tokens without the need for any middleman.
Fun fact: Uniswap’s smart contract address starts with “1f984” which is Unicode for unicorn emoji 🦄.
💡 What role does UNI token play ?
UNI is governance token for the Uniswap project. UNI token holders vote on updates to Uniswap and issuance of Uniswap treasury grants.
📝 Origin of Uniswap
- 2017: Hayden Adams, founder of Uniswap was fired from his first job as a mechanical engineer at Siemens. His friend Karl Floersch, who was working at Etherium Foundation motivated him to learn Etherium and smart contracts.
- Hayden decided to work on a real project to learn to code. He decided to implement the project described by Vitalik in his Reddit post and blog post.
- He built a proof of concept website the next year.
- 2018: Hayden received grant from Etherium Foundation.
- November 2018: Uniswap version 1 was released, which allowed trading between token and Etherium only.
- May 2020: Uniswap version 2 was released which allowed trading between two tokens.
- September 2020: Uniswap launched and airdropped UNI token to the community.
- May 2021: Uniswap version 3 was released.
👴🏻 Hayden Adams - Founder of Uniswap
- Hayden Adams studied a Bachelor of Engineering (B.E), Mechanical Engineering at Stony Brook University, and graduated in 2016.
- He started his career as an engineer at Siemens in 2016 but was soon fired in 2017.
- He started working on Uniswap in 2017.
😌 What problems does it solve ?
- No trusted third party: Users are in control of their funds at all times. The exchange does not involve any middleman, unlike centralized exchanges such as Binance and Robinhood.
- Centralized exchanges pool all the funds and cryptocurrencies in one place, presenting a lucrative target for hackers.
- No complicated paperwork like KYC and long waiting period is involved.
- Listing tokens: Anyone can list their token on Uniswap. Whereas, investment bankers take millions of dollars in fees for listing stock on the share market.
- Uniswap can provides better prices for trading because it does not have to maintain a lot of servers and an army of engineers, unlike centralized exchanges that need to generate profit for their shareholders.
- Governments cannot regulate Uniswap, unlike centralized exchanges.
🤖How does it work ?
Uniswap uses “constant product market maker” equation instead of order book model to provide quotes for trading assets.
Uniswap has many liquidity pools that consist of token pairs, such that the product of the quantity of first token “A” and second token “B” always remain constant.
A * B = constant
The trader can take a portion of A but he will have to supply adequate B so that their product remains constant.
If the price of an asset gets mispriced as per the existing price of the asset in the real world: Arbitragers use the opportunity to deposit the expensive asset and take out cheaper asset rebalancing the pool.
Anyone can start a new liquidity pool by supplying the initial liquidity. Others can also join and add liquidity to existing liquidity pools. In return, .3% of the transaction fees are distributed among the liquidity providers in proportion to their liquidity.
Impairment loss: Over a period of time as traders trade with the liquidity pool, it can happen that:
- The ratio of the two assets in the liquidity pool changes, such that there is more of one asset and less of another.
- It is possible that the liquidity provider could have been better off holding the two assets in equal proportion, instead of the new ratio.
Uniswap v3 allows liquidity providers(LP) to specify the range in which they want to provide liquidity ie. their capital will only be used when the price of the asset is in the specified price range.
Version 2, used “constant product market maker” equation, which resulted in uniform distribution of liquidity from 0 to infinity. This is not the most effective distribution of liquidity. Consider stablecoin pairs, where the relative price of the two assets stays relatively constant. The liquidity outside the typical price range of a stablecoin pair is rarely touched.
In version 3 liquidity provides have a choice in which price range they want to provide liquidity. This results in higher liquidity at prices ranges where most trading takes place.
However, the liquidity provider does not earn any trading fees if the price of the asset goes outside his specified price range.
Each asset pair is unique, having different volatility and characteristics. Uniswap version 3 lets the market decide the shape of the curve instead of trying to use a single constant product market maker for all token pairs.
⚙️ How to use Uniswap
🏛️ Governance model
UNI is the governance token for Uniswap platform. UNI holders vote on updates to Uniswap protocol and funding of projects from Uniswap treasury.
Following steps are involved in implementing an update to Uniswap:
🤑 How much money does the project have for future development ?
- Uniswap has raised a total of $11M in funding over 5 rounds.
- Uniswap treasury has 43% (430,000,000 UNI) of the total UNI token supply.
- Crypto industry is growing. So is the demand for major and long tail of cryptocurrencies.
- The value of UNI tokens held in Uniswap treasury is over $9 billion.
- Network effects: More liquidity providers will attract more traders. More trading fees will attract more liquidity providers. This positive feedback loop has potential to cause exponential growth in a short period of time.
😨 Risks and challenges
- Trading sector is heavily regulated by their respective governments, central banks and securities & exchange commission. Many governments will try to ban/regulate Uniswap for operating without a license.
- Vampire attacks: Uniswap code is open-source. Many projects like Sushiswap, Binance have copied Uniswap’s code and launched direct competitors to Uniswap.
- Liquidity pools hold tokens worth millions of dollars presenting a lucrative target for hackers.
- Uniswap does not have a mechanism to modify its existing contracts. If any significant upgrade needs to be made it will require liquidity providers to withdraw their funds and migrate them to a new set of contracts.
- It is very easy to list new tokens on Uniswap. Many malicious users have exploited this opportunity by listing scam coins on Uniswap.
- There are many crypto projects building decentralized exchanges.
1 billion UNI were minted and distributed as follows:
- 60.00%(600,000,000 UNI) to Uniswap community members.
- 21.266%(212,660,000 UNI) to team members and future employees with 4-year vesting.
- 18.044%(180,440,000 UNI) to investors with 4-year vesting.
- 0.69%(6,900,000 UNI) to advisors with 4-year vesting.
A perpetual inflation rate of 2% per year will start after 4 years, ensuring continued participation and contribution to Uniswap at the expense of passive UNI holders.
Uniswap team has not specified how these new tokens will be distributed, but they will likely go into the governance treasury.
Token’s price increases due to demand pressure.
Demand pressure on UNI token will come from:
- Governance: Users will buy UNI tokens to take part in Uniswap governance.
- Speculators: They will buy UNI tokens for future price appreciation.
Crypto exchange market is a multi-billion dollar industry growing at an exponential rate. The governance token of a project that aims to disrupt this industry will be worth a lot.
🧐 Indicators to watch out for
- Uniswap’s Twitter following is growing:
- Trading volume is growing:
- Total value locked in Uniswap pools is growing: