Uniswap Exchange is one of the largest decentralized cryptocurrency exchanges. The growing interest in decentralized finance applications is also evidenced by the interest in the Uniswap coin, which was launched in September 2020 (UNI).
In recent years, global crypto trading has mainly happened on centralized trading platforms. Investors looking to buy cryptocurrencies such as Bitcoin, Ethereum, or Uni were only able to do so through a centralized intermediary.
Swap, earn, and build on the leading decentralized crypto trading protocol. — uniswap.org
The Uniswap Exchange (DEX) is transforming this landscape. In 2018, it was launched as an example of an Automated Market Maker (AMM). The base-building liquidity protocol allows coins to be exchanged directly, without central institutions managing transactions. Algorithms calculate the exchange rate based on liquidity, while smart contracts provide security in the process.
There is only one requirement for trading on the Uniswap Exchange: the coins must be ERC-20 tokens.
Large trading platforms still play a central role in the world of cryptocurrencies. Anyone who wants to trade Ethereum, Bitcoin, and Co. usually uses services like crypto.com* or BitPanda*. The problem is that anyone trading on such platforms means putting assets in the hands of a third party. One of the main advantages offered by virtual currencies is no longer provided: independence from large institutions. With its decentralized trading systems, the DeFi scene has therefore been trying for several years to create possibilities to detach the trading of the different coins and tokens from the centralized platforms (e.g. crypto.com* or BitPanda*).
Uniswap distinguishes itself from other decentralized trading platforms in one important regard: There are no order books. Anyone who has ever traded cryptocurrencies knows that most platforms, whether centralized or decentralized, work with so-called order books. Those who want to exchange Bitcoin for Ether, for example, publish an offer and hope that someone will accept it.
With Uniswap, the determination of the current exchange rates takes place automatically. This is supposed to significantly increase the trading speed and simplify investing. However, only Ether and ERC-20 tokens can be traded on Uniswap. Those who want to trade Bitcoin and other non-Ethereum-based cryptos have to rely on solutions like Wrapped Bitcoins.
How Does It Work?
The exchange uses two different smart contracts for its operation; an “exchange” contract and a “factory” contract. This enables the automatic execution of functions based on predefined conditions. In the specific case of Uniswap, the Exchange Contract governs trading transactions on the exchange. The Factory Contract is used to integrate new tokens on the platform and enable their trading.
However, the general ecosystem is mainly composed of three types of stakeholders:
1. Liquidity providers: Contribute capital to the various pools and receive rewards in return.
2. Traders: this group of users trades and exchanges tokens on the platform for a fixed fee of 0.30%.
3. Developers: users who are involved in the development of new tokens, trading interfaces, and tools that can be directly integrated into the Uniswap smart contracts.
So-called liquidity pools are formed by the liquidity providers. Two different crypto tokens are deposited into a liquidity pool. For example, it can be Ether (ETH) and Wrapped Bitcoin (WBTC). If there is no liquidity pool for this trading pair in the system yet, it will be executed as a new smart contract on the Ethereum blockchain. Anyone who wants to exchange WBTC for ETH or vice versa can now do so with the help of this liquidity pool. The following applies: If a trading partner wants to withdraw tokens from the pool, he must pay for them in the corresponding currency.
Anyone can add further credit into the liquidity pool. Both the founder of a liquidity pool and later investors receive so-called pool tokens upon deposit, which prove their claim to a portion of the collected balance and fees incurred for trades.
But why should users put their tokens in the Uniswap Smart Contract? Each exchange incurs 0.3% transaction fees, which are distributed to all users depending on their share of the liquidity pool. Unlike a centralized exchange, which keeps all transaction fees for itself, all “revenue” of the decentralized exchange (DEX) thus goes back to those who contribute to the liquidity. The user effectively gets a return on their deposit but sacrifices potential price gains if only one of the tokens increases in value. This potential loss is called “impermanent loss.”
The return depends on how much liquidity a trading pair has and how much this trading pair is exchanged. This page shows the current yield for the various trading pairs daily (yellow line).
Chances
With the campaign by banks and governments against cryptocurrencies and their centralized exchanges, they are ironically supporting the growth and desire for decentralized trading platforms. Decentralized platforms cannot be regulated or banned easily by governments and are often the only solution for investors to invest in cryptocurrencies when it is no longer possible or difficult to do so in their own country.
Also, from a security point of view, this means that without a central platform, there is also no central point to attack for cybercriminals. The platform also manages to be fairly easy to use and quite inexpensive compared to other crypto exchanges.
Risks
At Uniswap, the cost per transaction depends on the current throughput on the ETH Blockchain. When demand is extreme, prices can sometimes rise to a three-digit dollar amount per transaction. In addition to the fluctuating fees, there is also the possibility that transactions can fail. However, they still need to be paid. Since it is straightforward to list a new token on DEX, this provides opportunities for scammers. Fake tokens are often uploaded with the same name as the originals.
The platform was founded by Ethereum developer Hayden Adams. Originally, the protocol was known as Unipeg — Ethereum creator Vitalik Buterin eventually gave it its current name. According to Adams, the original inspiration for the Uniswap platform also came from one of Buterin’s blog posts. The platform exists to create liquidity for the DeFi sphere. Uniswap aims to keep token trading automated and open to anyone who owns tokens. At the same time, it improved trader efficiency compared to traditional exchanges.
Inspired by Ethereum’s vision, we have long committed to the ideals of permissionless access, security, and immutability, all indespensable components for a future where anyone in the world can access financial services without fear of discrimination or counterparty risk. — uniswap.org
Uniswap v2 And v3
Uniswap v1 was launched in November 2018 as a proof of concept for so-called Automated Market Makers (AMMs). Then, in May 2020, Uniswap v2 was launched with new features and optimizations. The launch of DEX was a huge success, with Uniswap v2 generating over $135 billion in trading volume in less than a year after launch.
Uniswap v2 fails to make optimal use of liquidity providers’ liquidity. This is due to the liquidity in the liquidity pools being evenly distributed across the price range of a token. As a result, a large part of the liquidity provided is not used at all, since most tokens trade within a certain range. This is where Uniswap v3 comes in: Concentrated liquidity is used on the latest version of the exchange.
Uniswap v3 was launched at the beginning of May 2021: the new version with “concentrated liquidity” gives individual liquidity providers (LPs) precise control over which price ranges their capital is allocated to. Individual positions are pooled together to form a combined curve that users can trade against. In addition, v3 has introduced multiple fee tiers: This gives LPs the option to be compensated appropriately — depending on their risk level.
In September 2020, Uniswap launched its governance token: the Uniswap Coin. Anyone who holds more than one percent of the available tokens is allowed to submit proposals for the further development of the protocol. Subsequently, every investor who owns any amount of UNI Coins is allowed to vote on the proposals. With this approach, the developers want to create a system that functions in a decentralized manner and is self-sustaining.
Another reason for the UNI token was to prevent users from switching to competitor DEX SushiSwap and leaving the network. SushiSwap is a fork of Uniswap that tries to attract Uniswap users by rewarding them with SUSHI tokens. Uniswap’s response was to create 1 billion UNI tokens, which were distributed to the 150 million users on the network. Each person received 400 UNI tokens at the time, which was equivalent to about $1,000.
UNI can either be purchased on a centralized platform or a decentralized one. For the centralized approach, I’d personally recommend crypto.com* as an easy-to-use trading platform with a user-friendly interface and step-by-step instructions. Crypto.com*offers a whole ecosystem with a credit card (including crypto-cashback), staking, and many more features. Read more here.
For EU citizens, Bitpanda* also provides a well-rounded service including savings plans and even supports stocks and precious metals at low fees. Here you go*
For anyone seeking a more advanced platform with lower fees, give BitForex* a try!
… decentralized!
You can also purchase Uniswap on the decentralized exchange. However, this is not possible with fiat currencies. You either need Ethereum or an ERC-20 token that is compatible with the platform. All you have to do is go to the website and select “Use Uniswap”. You will then be automatically redirected to the exchange interface.
Uniswap is a DeFi flagship project. Uniswap is truly decentralized as no one can stop the exchange since the developers have not implemented any admin key or backdoor in the smart contract to customize it. Uniswap has enough potential to continue to compete in the market in the future. This is also supported by the highly qualified team of developers and the ever-growing community behind it. The promising market-making process not only lowers the risk and reduces the costs for all users in the network, but also technically allows anyone to create a liquidity pool for any pair of tokens. Some experts have already made predictions about Uniswap’s future development. Coinquora, for example, expects the UNI token to trade at $100 in three years. After all, it is difficult to make an exact forecast as it depends heavenly on internal as well as external factors that play a significant role in determining the success of the project.
Overall, however, the Uniswap forecasts can be considered positive.
This news is republished from another source. You can check the original article here
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