Uniswap

What is Uniswap (UNI)?

Uniswap is a digital currency and a decentralized exchange. UNI is an ECR-20 (Ethereum) based token. It has no maximum supply of tokens and is a governance token, which means the owners vote on changes to the platform (sort of like how stockholders have voting rights).

Decentralized means it has no order books, no central facilitators, and no centralized party making decisions. All platform and protocol decisions are made by Uniswap users (owners) in collaboration.

Decentralized Exchanges (DEXs)

Cryptocurrencies work on two primary types of exchanges– decentralized and centralized.

Centralized exchanges:

Example: Coinbase acts as the middleman of crypto purchases and sales. Centralized exchanges often have custodial crypto wallets, know-your-customer (KYC) requirements, and a limited number of cryptocurrencies available to trade.

Decentralized exchanges:

Example: Uniswap exchange. In contrast, decentralized exchanges (DEXs) don’t use an intermediary for trades. DEXs rely entirely on smart contracts to facilitate trades. Most DEXs don’t have custodial wallets and use “liquidity pools” to fund transactions.

Liquidity pools are pairs of tradable digital assets. On the Uniswap exchange, investors can put any Ethereum (ECR-20) -based token into the liquidity pool. They are then paid trading fees in the form of LP tokens every time pairs of digital currencies are swapped for one another. At this time, Coinbase reports over 500 different cryptocurrencies supported by Uniswap.

Who runs it?

Hayden Adams, a former Siemens engineer, created Uniswap. After being laid off by Siemens, Adams taught himself how to code while living at his parents’ house and developed the code for the Uniswap decentralized exchange.

The Uniswap platform officially launched in November 2018 and since then has functioned as intended – entirely decentralized. Trading is direct (peer-to-peer) and completed through smart contracts.

How it works

Uniswap investors add pairs of tradable cryptocurrencies, such as ETH and UNI, to the liquidity pool. When they do so, they get paid in UNI when anyone swaps between those two digital currencies.

Liquidity pools are buckets of digital tokens that are tied into a smart contract. LPs provide fast and efficient trading of digital currencies and deliver investment returns to investors that add to the pool.

UNI tokens are the governance tokens of the Uniswap exchange. They are tradeable on other cryptocurrency exchanges along with the Uniswap exchange itself. Owners of Uniswap participate in voting on the governance of the protocol and exchange. It is an ECR-20 (ether-based) token.

What it does

The Uniswap platform uses liquidity pools (LPs) to complete its market instead of an order book, typical of most cryptocurrencies. Smart contracts define the LPs, manage token swapping, and handle the adding of liquidity. Instead of using a middleman with order books, all transactions are entirely peer-to-peer and completed with smart contracts.

What’s in store for UNI?

Uniswap has undergone various updates since it launched in 2018. The most recent advancement, v3, was launched in May 2021. The v3 update made vast improvements to the coin’s capital efficiency and reduced gas (fees).

The update also introduced “concentrated liquidity,” liquidity allocated within a custom price range. This allows traders deeper liquidity while earning more trading fees with their capital. Along with concentrated liquidity, limit orders were introduced with v3, which will enable users to control how their pairs of cryptocurrencies are used within the LP.

The v3 of Uniswap was recently Alpha launched on the Optimism scalability stack for ethereum. The Optimism stack aims to improve traditional web experiences for DeFi applications. Its roadmap includes smart wallet EOAs, power and scaling improvements, and transaction sequencing decentralization.