Uniswap

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21 Aug, 2024

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Uniswap is a decentralized network protocol built on the Ethereum blockchain, designed to facilitate token swapping and trading without the need for centralized intermediaries or order books. It aims to prioritize user autonomy. The creation of Uniswap Labs can be attributed to Hayden Adams, a mechanical engineer, who initiated the project in November 2018.

Listing tokens on the Uniswap exchange doesn't involve an official fee. Users, however, must be aware of potential gas fees associated with Ethereum transactions. Uniswap operates as an open-source protocol, making its code accessible to all users. It also supports decentralized trading across various networks, contributing to its popularity in decentralized finance (DeFi).

What Is Uniswap?

Uniswap is a decentralized platform on the Ethereum blockchain designed for token swapping via automated market maker (AMM) protocol.
Developed by mechanical engineer Hayden Adams, Uniswap was officially launched on November 2, 2018, and operates under the governance of its native coin, UNI.
Users contribute liquidity by depositing tokens into pools and listing them on the exchange through a factory contract.
The platform allows seamless token swapping via exchange contracts for a user-friendly trading experience.
Uniswap charges a 0.3% swap fee, with 0.25% going to liquidity providers and 0.05% retained for platform operations.

Uniswap Explained

Uniswap is a decentralized protocol designed for swapping ERC-20 tokens with other tokens. It operates as a permissionless exchange, allowing tokens to be quickly listed and traded. It also offers flash swaps on its platform, facilitated through liquidity pools, automated market makers (AMMs), and smart contracts. Liquidity providers deposit their tokens into these pools, provide the necessary assets for swap transactions, and receive governance tokens (often called UNI tokens) based on their contribution. The platform boasts over 72,000 liquidity pools.

Smart contracts play a vital role in ensuring the protocol's immutability. Two smart contracts are involved: the Factory contract, responsible for adding tokens to the Uniswap platform as liquidity accumulates, and the exchange contract, enabling users to swap tokens. Uniswap typically charges a 0.3% fee for swaps, with 0.25% going to liquidity providers and the remaining 0.05% staying with the platform. To initiate a swap, users need to submit an equivalent amount of tokens; for example, exchanging 1000 tokens of type A for 1000 tokens of type B.

Uniswap operates on an AMM model, adjusting token prices based on supply and demand dynamics. It employs the equation k = x * y, where x and y represent the quantity of tokens A and B in a liquidity pool, and k is the constant value. While a large liquidity pool ensures price stability, insufficient funds in a Uniswap swap can impact platform liquidity. It highlights the importance of a price oracle to maintain accurate token pricing.

History

Uniswap Labs laid the foundation for the protocol on November 2, 2018, and it was officially launched on the last day of the Devcon 4 conference. However, the project's origins can be traced back to early 2018 when Hayden Adams, a mechanical engineer, became inspired by his friend Karl's blog posts on constant product market makers.

With limited knowledge, Hayden began writing smart contracts for Uniswap. The initial version of Uniswap struggled to fit into Layer 1 of the Ethereum blockchain, but after necessary corrections, the Ethereum blockchain accepted the proposal in July 2018. Funding from a grant received at this point allowed Hayden to initiate an audit of the platform.

In the original version, liquidity pools required ETH (Ether) to facilitate trading, resulting in high gas fees and user slippage. However, in May 2020, Uniswap Labs introduced the second version, V2, which eliminated the need for ERC-20 tokens in liquidity pools and introduced flash swaps. In August 2020, the team raised $11 million from notable investors in a Series A funding round.

On September 16, 2020, the platform launched its governance token 'UNI' as a reward for liquidity providers. Users who had interacted with the protocol before September 1 were eligible to receive 400 UNI tokens worth $1200. This distribution reached almost 50,000 addresses on the Ethereum blockchain.

In May 2021, Uniswap introduced its latest version, V3, which brought features like concentrated liquidity, flexible fees, advanced oracles, and other enhancements. Furthermore, in April 2023, the exchange rolled out a Uniswap wallet for its users.

Examples

Let us look at some examples of this protocol to comprehend the concept better.

Example #1

Let us consider George, a crypto trader with a portfolio of various cryptocurrencies valued at $90,000, consisting of over 3000 coins. George wants to leverage his crypto holdings without selling them and is particularly interested in swapping his Ethereum (ETH) for DAI stablecoins. To achieve this, George decides to provide liquidity to Uniswap pools using his preferred tokens. As a reward for contributing liquidity, he receives UNI tokens.

In one instance, George swaps 200 ETH for 336,111 DAI tokens through the Uniswap protocol. During this transaction, he incurs a gas fee of $19.07, the cost associated with processing the swap on the Ethereum blockchain.

If George had chosen to exchange his ETH for wrapped Bitcoin (WBTC) instead, he would have received approximately 12.3695 WBTC coins based on the prevailing exchange rate.

Example #2

Uniswap, a decentralized exchange (DEX), is seeking an on-chain vote to gain approval to release the second tranche of $74 million in funding. This funding is intended to support the development efforts of the Uniswap Foundation. This tranche, worth around $62 million with a 10% price volatility buffer, faces an on-chain vote on October 4, 2023. If approved, these funds will support Uniswap's operations and research grants.

The Uniswap Foundation's focus includes enhancing core protocol metrics, fostering innovation, and aligning stakeholder incentives. Over the past year, they spent $4.8 million on research grants $3.15 million on operations, and experienced a $1.29 million loss due to the UNI token's market decline. They plan to disburse $10-$15 million annually, with an increasing rate over time from the remaining $53.2 million grant capital. This funding is pivotal for Uniswap's growth and sustainability.

Pros And Cons

The Uniswap protocol has several swapping benefits for the users. However, it does have some limitations to it. Let us look at them:

Pros	Cons
It is compatible with the Ethereum blockchain.	Failure to maintain liquidity can cause price slippage and loss of investment.
The protocol allows easy swapping of crypto tokens.	There are equal chances of bugs or malicious actors on the protocol.
It supports multiple wallets and crypto coins.	It only supports the Ethereum blockchain. Thus, users must pay gas fees only in ETH.
People (or liquidity providers) receive UNI tokens for staking in liquidity pools.
Reward incentives like airdrops are also available for users.
It works on an automated market maker to determine the price of tokens.
There is no mining facility. Instead, the users are paid for the coins they stake.

Uniswap vs Balancer vs Binance

Although Uniswap, Balancer, and Binance are competitors, they have different algorithms and features. Let us look at their differences:

Basis	Uniswap	Balancer	Binance
Meaning	It is a protocol that allows swapping of tokens.	The Balancer is a decentralized exchange that enables liquidity and swapping.	Binance is a crypto exchange that allows trading of crypto tokens.
Launch date	November 2018	March 2019	July 2017
Control	It is a decentralized platform.	Decentralized platform	It is a centralized platform for crypto trading.
Liquidity	Yes, it provides liquidity to users.	It contains liquidity pools in its protocol.	Binance works on a traditional order book system.
Fees	Gas fees	Gas fees	Transaction fees
Tokens	UNI is the native token of this platform.	BAL is the token of the Balancer.	BNB is the governance coin of the Binance platform.

Frequently Asked Questions (FAQs)

1. Can Uniswap be hacked?

Many phishing and malicious attacks have occurred on the Uniswap platform in the past two years. However, the latest sandwich attack occurred in April 2023, when the hackers took advantage of the pricing system of the protocol and stole $25.2 million coins.

3. What price did Uniswap start at?

During the launch of Uniswap's ICO, the token's price was $2.50 in September 2020. Later, on September 18, 2020, the coin surged to $5.50 in just 24 hours. However, the current price of the token has been reduced to $4.22.

3. Is Uniswap legal in all countries?

Uniswap is not accessible in certain countries due to legal restrictions. These countries include the United States, Liberia, Sudan, Zimbabwe, Belarus, Cuba, Iran, North Korea, Syria, Iraq, and Côte d'Ivoire. Despite these restrictions, Uniswap offers its services to U.S. citizens through MoonPay.

4. Can you stake Uniswap tokens?

Following are the ways to stake Uniswap coins via liquidity pools. Let us look at them:
- Open an account on any decentralized wallet that supports the Ethereum blockchain, like Kraken.
- Deposit ETH tokens in the pool.
- Stake and earn rewards up to 25% of the liquidity provided.