What is cryptocurrency Uniswap (UNI) and how does it work?

What Is Uniswap (UNI)?

Uniswap is an innovative decentralized exchange protocol built on Ethereum. More specifically, Uniswap is an Automated Liquidity Protocol. There is no order book or any centralized party needed. Thanks to the contracts built into its protocol, Uniswap is able to allow users to trade without any intermediaries, achieving a high level of both decentralization and censorship-resistance.

You may be wondering, how could trades possibly happen without an order book?

Uniswap has devised a protocol that relies on liquidity providers creating liquidity pools which then provide liquidity across the platform, allowing users to seamlessly swap between essentially any ERC-20 tokens – all without the need for an order book.

Since the Uniswap protocol is completely decentralized, there is no real listing process like a centralized exchange has. Any ERC-20 token can be launched for trading on the Uniswap platform as long as there is a liquidity pool available. Because of this, Uniswap does not charge any listing fees, making it an essential resource for new or smaller ERC-20 projects.

How Does Uniswap Work?

Uniswap ditches the traditional architecture of digital, centralized exchanges, making the order book a thing of the past. This is made possible in part due to their Constant Product Market Maker design, which is a variant of a more common decentralized exchange model known as Automated Market Maker (AMM).

Automated Market Makers are smart contracts that hold liquidity reserves (pools) that traders can use to trade against. These reserves are funded by incentivized liquidity providers. Anyone able to deposit an equivalent value of two different tokens in the pool is capable of being one of these liquidity providers. In return for their stake in liquidity pools, traders pay a fee to the pool that is then distributed to liquidity providers according to their share of the pool.

Liquidity providers create a new available trading market by depositing an equal value of two tokens. These can be ETH and any ERC-20 token, or two ERC-20 tokens. Often, these pools are made up of stablecoins such as DAI, but this isn’t mandatory. In return for creating markets and providing liquidity so traders can trade, Uniswap liquidity providers are rewarded with “liquidity tokens,” which typically represent their share of the entire liquidity pool.

Let’s break down the concept of Uniswap liquidity pools by using an ETH/DAI liquidity pool as an example. For our formula, the ETH portion of the pool will be “x”, while the DAI portion will be “y”. What Uniswap does is take these two amounts and multiplies them in order to calculate the total liquidity in the pool – in the formula, this will be “k”. The primary concept powering Uniswap is that “k” must remain stable at all times, meaning the total liquidity in the pool is constant.

So, the formula for total liquidity in the pool is:

x * y = k

What if someone wants to make a trade?

For example, say David buys 1 ETH for 1600 DAI using the ETH/DAI liquidity pool. By doing this trade, David has increased the amount of DAI in the pool while reducing the amount of ETH. This effectively means that the price of ETH goes up, because there is less ETH in the pool after the transaction, and we know that the total liquidity (k) must remain constant. This mechanism is what drives the pricing of the currencies in the pool.

Who Are the Founders of Uniswap?

Uniswap was first released in 2018 by founder Hayden Adams. In 2020, Uniswap v2 launched, enabling direct swaps between essentially any ERC-20 token on Ethereum.

Uniswap’s September 2020 UNI token launch included an airdrop of 400 UNI tokens to any ETH address that had completed a transaction on the network before September 1st of that year.

Additionally, some users received more tokens based on the amount of liquidity they provided to the Uniswap protocol.

What Makes Uniswap Unique?

One of the more unique things about Uniswap is the fact that the project itself does not receive any revenue.

Because Uniswap is a decentralized protocol and its users provide all of the liquidity for the platform, all fees go directly to the liquidity providers. This is far-removed from centralized exchanges, where the fees are all absorbed by the central authority operating the exchange.

The current transaction fee paid to the network’s liquidity providers is 0.3% per trade. These funds are automatically sent to the liquidity pool, with liquidity providers able to redeem them at any time. These trading fees are distributed based on each liquidity provider’s share of the pool.

It is possible that a portion of trading fees may be dedicated to Uniswap development in the future. The Uniswap team has already deployed an improved Uniswap v2 protocol, and are actively developing Uniswap v3.

What Gives Uniswap Value?

Uniswap introduced UNI, its governance token, on September 17, 2020. Uniswap did not run an ICO or any kind of token sale. Uniswap will distribute its UNI tokens according to a set release schedule to both community members (active traders) and liquidity providers.

Uniswap UNI

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Uniswap ran a very valuable airdrop to celebrate its launch, offering 400 UNI tokens (estimated $1,500 at time of airdrop) to users who had previously used the Uniswap decentralized exchange protocol.

Going forward, users are also able to earn UNI tokens by staking tokens in Uniswap’s liquidity pools. Staking tokens in order to reap rewards from liquidity pools is commonly known as yield farming or liquidity mining.

The UNI token is designed to be used in the future governance of the Uniswap protocol. UNI holders who hold 1% or more of the total UNI supply can submit development proposals, while any UNI holder, regardless of how much they hold, is able to vote on these proposals. UNI holders can also help fund grants, partnerships, liquidity mining pools, and more.

Uniswap governance has been designed in a way that will eventually let the core Uniswap team step out of the decision-making process entirely, achieving a truly self-sustaining and completely decentralized protocol.

How Many Uniswap (UNI) Coins Are in Circulation?

Uniswap (UNI) has a current token supply of 1,000,000,000 UNI. All of these UNI tokens will become available over the course of four years. After four years, when all of these tokens have been distributed, Uniswap will introduce an inflation rate of 2% per year in order to maintain network participation.

60% of the 1 billion UNI token supply was airdropped to Uniswap community members (ETH addresses that had actively traded with the Uniswap protocol). The remaining 40% will be distributed to team members, investors, and advisors according to a 4-year plan.

Other Technical Data

Uniswap operates two different smart contracts as part of its protocol – an “Exchange” contract and a “Factory” contract.

These are automated, decentralized programs that are designed to perform specific functions when certain conditions are met.

In Uniswap’s case, the “Factory” smart contract is responsible for adding new tokens to the platform, while the “Exchange” contract is what powers the actual trades/swaps. Essentially any ERC20-based token can be swapped with any other on the updated Uniswap v2 platform.

How Is the Uniswap Network Secured?

Uniswap is a decentralized protocol designed for token swaps / trades, and UNI is its native governance token. UNI is an ERC-20 token, built on the Ethereum network.

The UNI governance token acts to secure the Uniswap project’s future development, creating a decentralized voting system that ensures bad actors cannot just propose and enact development upgrades that may damage the reputation or security of the platform.

Trades performed on the Uniswap platform are secured by its “Exchange” smart contract, a decentralized marvel allowing for users to trade at any time without any need for a central authority.

How To Use Uniswap

Uniswap (UNI)’s primary use case is as a governance token. Holders can bind their UNI to an address, delegating their voting power. Users can choose to delegate themselves.

Uniswap (UNI) tokens offer utility for different entities and individuals. It enables an alternative, decentralized payment method outside of the interference of intermediaries, providing more control over your money.

UNI can also be used for speculation and investment, or as an alternative to expensive and slow international transfers. It can also contribute to an alternative financial system for the hundreds of millions of people that have access to smartphones but not a bank account, while also introducing a new opportunity for income generation or supplementation through UNI liquidity staking.

How To Choose a Uniswap Wallet

The type of Uniswap (UNI) wallet you choose will likely depend on what you want to use it for and how much you need to store.

Hardware wallets or cold wallets provide the most secure option with offline storage and backup. Ledger provides basic ERC-20 support, allowing users to store, send, and receive UNI. At time of writing, Trezor UNI solutions are still in development. Hardware wallets can involve a bit more of a learning curve and are a more expensive option, however. As such, they may be better suited to storing larger amounts of UNI for more experienced users.

Software wallets provide another option and are free and easy to use. They are available to download as smartphone or desktop apps and can be custodial or non-custodial. With custodial wallets, the private keys are managed and backed up on your behalf by the service provider. Non-custodial wallets make use of secure elements on your device to store the private keys. While convenient, they are seen as less secure than hardware wallets and may be better suited to smaller amounts of UNI or more novice users.

Online wallets or web wallets are also free and easy to use, accessible from multiple devices using a web browser. They are considered hot wallets and can be less secure than hardware or software alternatives, however. As you are likely trusting the platform to manage your UNI, you should select a reputable service with a track record in security and custody. As such, they are most suited for holding smaller amounts or for more experienced frequent traders.

Kriptomat offers a secure storage solution, allowing you to both store and trade your UNI tokens without hassle. Storing your UNI with Kriptomat provides you with enterprise-grade security and user-friendly functionality.

Buying and selling UNI, or exchanging them for any other cryptocurrency, is done in mere moments when you choose our secure platform as your storage solution.

Uniswap Staking

The Uniswap decentralized exchange platform utilizes Liquidity Pools that users can stake in to provide liquidity.

Every Uniswap liquidity pool is essentially a new trading pair of ERC-20 tokens. When a pool contract is first created, its balances of each token are 0. For the pool to begin allowing trades, users must first fund it with an initial deposit of each token. This first liquidity provider is responsible for setting the initial price of tokens in the pool.

When other liquidity providers add to an existing pool, they must deposit both tokens equivalent to their current price. If they don’t, the liquidity they added is at risk of being arbitraged. If the depositing user believes that the current price is incorrect, they may actually arbitrage it to the level they desire, and then add the liquidity at that price.

When ERC-20 tokens are deposited into a liquidity pool, unique tokens known as “liquidity tokens” are minted and distributed to the liquidity provider’s address. Liquidity tokens represent a liquidity provider’s contribution to a pool. The amount of the pool’s liquidity that has been provided determines the number of liquidity tokens the provider receives. If the provider is creating a new liquidity pool, then the number of liquidity tokens they will receive will equal sqrt(x * y), where “x” and “y” represent the amount of each token provided.

When a trade occurs in the pool, a 0.3% fee is charged to the one initiating the transaction. This fee is distributed to all liquidity providers upon completion of the trade.

To retrieve their deposited liquidity, plus any fees accrued, liquidity providers must “burn” their liquidity tokens. This effectively exchanges them for the liquidity provider’s rightful portion of the liquidity pool + trading fee allocation.

As liquidity tokens are themselves tradable assets, liquidity providers may also sell, transfer, or otherwise use their liquidity tokens in any way they see fit.

Conclusion

Uniswap is an innovative project that has delivered the most popular decentralized exchange in the crypto industry.

The Uniswap project’s decentralization and open governance through its UNI token make it very popular among blockchain advocates who oppose big, centralized cryptocurrency exchanges. Additionally, Uniswap’s liquidity pools are an attractive endeavor for investors who want to earn income on the cryptocurrency they already hold – without selling it.

Uniswap FAQ

Most of the frequently asked questions about the Uniswap protocol were answered above. There are a handful left to focus on:

How Can I Add a Token to Uniswap?

Uniswap is compatible with any ERC-20 token. Any user with a web3 wallet (such as Metamask) and the ETH to pay gas fees can launch a liquidity pool for any token, effectively listing it on the exchange for 0 fees paid to the exchange itself.

What is Yield Farming?

Yield farming, or liquidity mining, is the practice of staking / depositing cryptocurrencies you hold in return for rewards. The general idea is that individuals can earn tokens in exchange for providing the liquidity necessary to facilitate trades of a specific token pair on the platform.

How To Buy Uniswap (UNI)

Buying UNI is as easy as visiting Kriptomat’s how to buy Uniswap (UNI) page and choosing your preferred method of payment.

How To Sell Uniswap (UNI)

If you already own Uniswap (UNI) and hold it on a Kriptomat exchange wallet, you can easily sell it by navigating the interface and choosing your desired payment option.

Uniswap (UNI) Price

Several factors influence Uniswap price, including exchange inflows and outflows, sentiment, technical and fundamental developments, the news cycle, and the general economic environment.

Uniswap price is also directly impacted by the demand for it by those using the network.

Ultimately though, the price is decided at any given moment by the cumulative buying and selling of millions of participants worldwide. You can keep up to date on the latest price action and news using crypto exchanges like Kriptomat or one of the many different cryptocurrency tracking services.

The current Uniswap (UNI) price is EUR.

The 24-hour trading volume of UNI is EUR. UNI is currently ranked of all cryptocurrencies by total market capitalization, with a market cap of EUR. It has a circulating supply of UNI.

Register now to begin your journey into the world of Uniswap and cryptocurrencies with Kriptomat!

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