Introduction
Uniswap is a decentralized exchange protocol built on the Ethereum blockchain. It enables users to seamlessly and securely swap ERC-20 tokens without the need for a centralized exchange. CryptoNewsHerald explains the workings of the Uniswap exchange and how it can be used to make easy and secure token swaps.
05/03/2022
BaseDeFiTrading and investment
BaseDeFiTrading and investment
What is Uniswap?
Uniswap is a decentralized protocol for trading cryptocurrencies based on smart contracts. Works on the Ethereum network. One of the top five DeFi apps in terms of blocked funds. Uniswap was the first project to implement an automated market maker and liquidity pools.
Who created Uniswap and when?
The creator of the Uniswap protocol is Hayden Adams. In the summer of 2017, he retired from Siemens, where he worked as a mechanical engineer after graduating from college. On the advice of his friend Carl Flersch, then at the Ethereum Foundation, Adams began to study smart contract development.
A few months later, Carl suggested to Adams that he create a digital asset trading application that would use the Automated Market Maker (AMM) mechanism.
Alan Liu, the developer of the Gnosis project, was the first to propose the idea of AMM on Ethereum. His colleague Martin Koppleman passed the concept on to Vitalik Buterin, who outlined it on Reddit in 2016 and personal blog.
In August 2018 Adams received from the Ethereum Foundation a $100,000 grant to implement the concept.
Adams was helped in the creation of Uniswap by Microsoft and Google developer Kallil Capuozzo, programmers Uchiel Vilchis, Philip Dayan, Dan Robinson, Andy Milenius and others.
By March 2018, the developers submitted demo version Uniswap. November 2, 2018 took place launch of the full version of the protocol.
Presenting Uniswap, Adams listed its main features:
“There is no central token or platform fee. There is no special treatment for early investors, users or developers. Token listing is free. All functions of the smart contract are open, they can be improved.”
Who came up with the name Uniswap?
Adams originally wanted to call the protocol Unipeg, derived from the words Unicorn (“unicorn”) and Pegasus (“Pegasus”). When Carl Flersch first told Vitalik Buterin about the project, he said, “Unipeg? Uniswap sounds better.” Adams agreed to the proposal.
How does Uniswap work?
The Uniswap protocol includes a series of smart contracts that allow any user to directly trade with each other on the Ethereum blockchain. Technically, it is a decentralized exchange (DEX).
Uniswap and other AMMs: instructions for use for beginners
Uniswap is a public tool that distributes rewards among liquidity providers. Providers support the exchange by “locking” tokens, which allows other users to trade in a decentralized system.
The platform does not require registration and passing KYC and AML procedures. To use it, you only need a browser-based wallet that supports the Ethereum network, such as MetaMask.
What are liquidity pools?
Since Uniswap is a decentralized project, it does not have an administration that selects new cryptocurrencies for listing, as on centralized exchanges. Anyone can add a new ERC-20 asset to Uniswap.
To do this, you need to open a liquidity pool – a separate “market” for a specific trading pair. To open a pool for a new token, you need a certain number of new tokens, as well as an ERC-20 base currency for the same amount.
Uniswap does not link sellers and buyers to set the price of digital assets, but uses the equation: x * y = k. In the equation, x and y represent the number of tokens available in the liquidity pool; k is a constant value.
Based on the balance between tokens in a pair, as well as between supply and demand, the equation calculates the price of a particular token. This pricing and quotation mechanism is called an automated market maker (AMM).
Each token has its own smart contract and at least one liquidity pool. Any Uniswap user can trade this coin or deposit funds into the liquidity pool and get rewarded from the fees.
Whenever new tokens are added to the Uniswap liquidity pool, the user receives an ERC-20 “pool token” (LP). Pool tokens can be exchanged, moved and used in other decentralized applications.
When the funds are in demand, the pool tokens are burned. Each such token represents the user’s share in the total assets of the pool. It also allows the holder to receive a pro rata share of the exchange fees that the pool collects.
How are tokens traded on Uniswap?
The Uniswap protocol is available through the interface uniswap.org. You can connect to it using an Ethereum-enabled browser wallet.
The user can exchange tokens or add assets to the Uniswap liquidity pool. It is necessary to select the token that the user wants to receive and the asset with which he wants to pay. The user must then approve the transaction with their wallet and confirm the transaction by paying a fee to the Ethereum network.
Uniswap can also be accessed through DeFi aggregators — special applications that collect data about pools in real time, allow you to connect to several decentralized protocols at once through a single platform, and also provide additional functions. Popular DeFi aggregators include 1inch, InstaDApp, Zapper.
In addition, special liquidity managers work to simplify trading and increase profitability.
Financial Alchemy: How to Increase Income with Uniswap Liquidity Managers v3
What is Uniswap v2?
In April 2019, the project team raised over $1 million following an investment round led by Paradigm investment company. These funds were used to create the second version of Uniswap (Uniswap v2) with a number of new features.
Ability to exchange any ERC-20 tokens among themselves
If in the first version of the protocol a new asset could only be placed in pair with ETH, then in Uniswap V2 any ERC-20 token can be placed in a pool with any other asset of the same standard. The main contracts use Wrapped Ether (WETH) instead of ETH, although end-users can still use ETH through sub-contracts.
If two ERC-20 tokens do not form a direct pair and do not have a common pair between them, their swap is possible as long as there is a path between them. Router contracts are used to optimize direct and multi-stage swaps.
Improved quote control
Uniswap v2 provides improved price control through the use of oracles.
Instant Swaps
Instant swaps provide for the possibility of withdrawing any number of coins to carry out, for example, arbitrage and margin trading operations.
What is a UNI token?
UNI is a governance token designed to participate in Uniswap control system, in particular for voting. The creators of the project suddenly announced its release in September 2020.
They decided to distribute the tokens in an unusual way. Instead of a token sale, the project team decided to carry out an airdrop: they accrued a fixed amount of UNI to each user of the decentralized exchange who at least once performed any actions on it.
What is a cryptocurrency airdrop?
Immediately after the issue, the value of Uniswap (UNI) increased several times, and it entered the TOP-50 cryptocurrencies by capitalization. According to CoinMarketCap, at the beginning of May 2022, the total capitalization of this digital asset exceeds $7 billion, it is traded on all leading cryptocurrency exchanges.
How is SushiSwap related to Uniswap?
For a long time, Uniswap has lagged behind centralized exchanges in terms of trading activity, and there have been apps in DeFi with much more locked-in funds (TVL), notably MakerDAO.
The popularity of the protocol began to grow sharply after the launch of its second version. According to DeFi Pulse, the TVL in the project has grown from about $36M at the launch of Uniswap v2 in May 2019 to nearly $2B by the end of September.
Against the background of the hype in 2020, other DeFi projects began to copy the Uniswap model, more precisely liquidity pools and the AMM mechanism, but at the same time added more attractive conditions for users to them.
At that moment, SushiSwap, a fork of Uniswap, became the main competitor. It had the only major difference – its own control token. In addition, it was originally possible to stake existing Uniswap liquidity tokens in this protocol to generate income. The governance token was distributed to all pool members, which significantly increased the size of their rewards. In a short time, SushiSwap managed to “poach” 70% of Uniswap’s liquidity.
However, after the reduction in the amount of token rewards, SUSHI lost its former liquidity indicators. Finally, Uniswap was able to regain its leadership after the release of the UNI governance token.
Just Add a Token: How Uniswap Became the First DEX to Overtake Coinbase
How is Uniswap evolving?
As of early May 2022, Uniswap remains one of the top DeFi projects, ranking fifth on DeFi Pulse in terms of locked funds with $7 billion.
In December 2020, Uniswap managed to collect a quorum for the first decision. Community members have approved a grant program for the development of the ecosystem using UNI tokens.
In May 2021, exactly one year after the presentation of the second version, work began already the third version of the decentralized exchange – Uniswap v3. It involves radically new features and components, including concentrated liquidity, limit range orders and multiple positions within the same pool.
Concentrated Liquidity and Optimism: Can Uniswap Maintain Its DEX Leadership?
Shortly thereafter, Uniswap users supported the launch of the protocol on the Ethereum network, Arbitrum’s second layer solution. In July of the same year, the decentralized exchange launched an alpha version of the platform on the Optimistic Ethereum mainnet. At the end of the same year, Uniswap was deployed on the Polygon network.
Under pressure from regulators in the summer of 2021, Uniswap stopped trading 129 tokens on its interface due to “the development of the regulatory landscape.” Since April 2022, the exchange has been blocking users under sanctions.
In the spring of 2022, the project team launched the Uniswap Labs Ventures venture division to invest in Web3 products.
What is Uniswap v3?
The new version of Uniswap differs from the previous version of the emphasis on capital efficiency, made through the concept of concentrated liquidity. Liquidity providers (LPs) now have the ability to choose a specific price range to provide funds to the pool.
This will allow market participants to concentrate liquidity where the main trading activity takes place. As a result, LPs can improve their return on equity by channeling spare cash into other pools and investment vehicles. This approach allows you to better diversify risks.
Uniswap v3 also introduces the concept of active liquidity. If the price moves out of the LP’s assigned range, liquidity is effectively removed from the pool, ceasing to generate commission income.
When this happens, the liquidity flows completely into one of the pool’s assets. At this moment, LP can either wait until the price returns to the specified limits, or change the price range to a more current one.
Uniswap also introduced a new order type – a limit range order (orig. Range Limit Orders). It allows LP to allocate tokens of the same type for a certain range above or below the current market price. When the price enters a user-specified corridor, one asset is sold after another. When using this function within a narrow range, you can achieve an effect similar to using a standard limit order.
Also, with the new release, multiple positions appeared in the protocol: LPs can provide liquidity to the same pool in accordance with different price ranges, which may partially coincide with each other.
Uniswap v3 has a three-tier liquidity provider fee structure with rates of 0.05%, 0.3% and 1% per trade. The company expects 0.05% fees to be used primarily for stablecoin pairs. A rate of 0.3% will be applied in pools like ETH/DAI, and 1% for trading much more volatile pairs with low-liquid assets.
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Conclusion
Uniswap is a decentralized exchange protocol built on Ethereum that enables the trustless trading of Ethereum tokens without the need for third-party intermediaries. By simplifying the process of creating and trading assets on the Ethereum blockchain, Uniswap provides a secure and intuitive way for users to access new and innovative financial products. Through its innovative use of smart contracts, Uniswap has become one of the most popular and secure decentralized exchanges available, allowing users to trade securely and conveniently on the Ethereum blockchain.
FAQ
What is the Uniswap exchange?
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