February 25, 2021 | AtoZ Markets – The burgeoning decentralized finance (DeFi) ecosystem aims to use decentralized, non-custodial financial products to replace centralized middlemen in financial applications such as loans, insurance and derivatives.
Uniswap is an example of one of the core products in the DeFi ecosystem, the decentralized crypto exchange, or DEX. DEXs aim to solve many of the problems of their centralized counterparts, including the risk of hacking, mismanagement, and arbitrary fees. However, decentralized exchanges have their own problems, mainly lack of liquidity—which means a lack of amount of money sloshing around an exchange that makes trading faster and more efficient.
Uniswap is trying to solve decentralized exchanges' liquidity problem, by allowing the exchange to swap tokens without relying on buyers and sellers creating that liquidity.
Read on as we explore what Uniswap is, how it works—and how it became one of the leading decentralized exchanges built on Ethereum.
What is Uniswap?
Uniswap is an open-source protocol and non-custodial crypto exchange that allows you to securely exchange Ethereum (ETH) and ERC-20 tokens without using the traditional orderbook model.
Uniswap bundles tokens into smart contracts, creating liquidity pools. Platform members can exchange assets, create new trading pairs and add tokens to pools to receive commissions.
Watch the video below to learn more about the story behind Uniswap - one of the most important protocols in DeFi.
Who created Uniswap and when?
The Uniswap protocol was created by the developer Hayden Adams.
On July 6, 2017, Adams resigned from Siemens, where he worked as a mechanical engineer after graduating from college. Adams' friend Karl Flersh, who worked at the Ethereum Foundation, advised him to become a smart contract developer.
Alan Liu, the developer of the Gnosis project, was the first to consider the possibility of creating market makers on Ethereum using the equation x * y = k. Liu's Gnosis colleague Martin Coppleman proposed this idea to Vitalik Buterin, who presented it in articles on his personal blog and on the Reddit platform.
In August 2018, Adams received a $100,000 grant from the Ethereum Foundation to implement the concept.
In creating Uniswap, Adams was assisted by Microsoft and Google developer Callil Kapuozzo, programmers Uchiel Vilchis, Philip Diane, Dan Robinson, Andy Milenius, and others.
By March 2018, the developers have submitted a demo version of Uniswap. On November 2, 2018, the full version of the protocol was launched.
Introducing Uniswap, Adams listed its main characteristics:
“There is no central token or platform commission. There is no special relationship to early investors, users, or developers. Token listing is free. All functions of the smart contract are open and can be improved. "
Who came up with the name Uniswap?
How does Uniswap work?
The Uniswap protocol includes a series of smart contracts that allow any user to trade directly with each other on the Ethereum blockchain. Technically, it is a decentralized exchange (DEX).
Uniswap is a publicly available tool that distributes rewards to 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 KYC and AML procedures. All you need is an Ethereum wallet like MetaMask. A hallmark of Uniswap is the use of a mechanism called the Constant Product Market Maker.
You can freely add an Ethereum asset to Uniswap by funding it with the equivalent value of ETH and a tradable ERC-20 token. For example, if a user wants to exchange Poop Token, he launches a new smart contract for Poop Token and creates a liquidity pool with Poop Token worth $ 10 and ETH worth $10.
Uniswap does not connect buyers and sellers to set the Poop Token price but uses the equation: x * y = k. In the equation, x and y represent the number of ETH and ERC-20 tokens available in the liquidity pool; k is a constant.
Based on the balance between ERC-20 and ETH tokens, as well as between supply and demand, the equation calculates the price of a particular token.
Each token has its own smart contract and liquidity pool. Any user can trade this coin or deposit funds into the liquidity pool, receiving a 0.3% commission on exchange transactions.
How are Uniswap tokens created?
Whenever new tokens are added to the Uniswap liquidity pool, the user receives an ERC-20 pool token. Pool tokens can be exchanged, moved and used in other decentralized applications.
When funds become demanded, pool tokens are burned. Each pool token represents the user's share in the pool's total assets and the pool's share of the trading commission of 0.3%.
How are tokens exchanged for Uniswap?
The Uniswap protocol is available through the uniswap.org interface. You can connect to it using an Ethereum wallet, for example, MetaMask.
The user can exchange tokens or add assets to the Uniswap liquidity pool. You need to select the token that the user wants to receive and the asset that needs to be paid. The user then has to approve the transaction using their wallet and confirm the transaction by paying a commission to the Ethereum network.
Since Uniswap is an open-source smart contract protocol, several user interfaces have already been created for it. For example, InstaDApp allows you to add funds to Uniswap pools without accessing the exchange interface.
The Zapper.fi interface makes it possible to add funds to Uniswap pools using only Ethereum, not ETH or another token. This service also offers one-click solutions for buying pool tokens in conjunction with bZx strategies.
What is Uniswap v2?
In April 2019, the project team raised over $1 million in a funding round led by investment firm Paradigm. With these funds, a second iteration of Uniswap was created with a number of new technical features.
The ability to exchange any ERC-20 tokens among themselves
In Uniswap V2, any ERC-20 token can be placed in a pool with any other asset of the same standard. Core contracts use Wrapped Ether (WETH) instead of native ETH, although end users can still use ETH through ancillary contracts.
If two ERC20 tokens do not form a direct pair and do not have a common pair with each other, their swap is possible as long as there is a path between them. To optimize direct and multistage swaps, Router contracts are used.
- Improved control of quotes
Uniswap V2 provides improved control of quotes through the use of oracles.
- Instant swaps
Instant swaps provide the ability to withdraw "as many coins as you want" for performing, for example, arbitrage and margin trading operations.
How is Uniswap evolving?
Although Uniswap launched in November 2018, for a long time the protocol was inferior in popularity to centralized exchanges, and in the DeFi space to landing protocols like Maker. An important factor in the success of the project was the launch of an updated version of the platform.
In August 2020, a fork of Uniswap called SushiSwap took place: a protocol with the SUSHI control token emerged. At the first stage, the fork allowed existing Uniswap liquidity tokens to be placed in the protocol to generate income. At the second stage, the migration of funds to pools on SushiSwap began.
Initially, SushiSwap poached the lion's share of funds from Uniswap users, but after the reduction in the distribution of tokens, SUSHI lost its former liquidity indicators. Uniswap's leadership solidified with the release of the UNI governance token, which was announced on September 16.
Shortly after the launch of UNI, experts from the analytical company Glassnode concluded that Uniswap management tokens are not locked in a smart contract and are located on regular Ethereum addresses, which raises questions about the degree of decentralization of the exchange.
Thanks to the implementation of UNI, Uniswap's Locked Funds (TVL) volume not only returned to its previous values but even exceeded them.
On December 24, 2020, the third vote in the Uniswap system ended, at which the proposed changes were approved for the first time: community representatives spoke about the grant program for the development of the ecosystem using UNI tokens.
Read also: Top 10 DeFi Coins in 2021
At the first stage, funding is designed for small projects, including hackathons. In the future, grants are planned to be issued to more significant initiatives. From 2021, organizers will begin accepting applications to support events in the form of rewards for their participants. The wider community will be involved in decision-making.
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