Deep Dive Into Uniswap: Beginner’s Guide to the Leading Decentralized Cryptocurrency Exchange
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Uniswap is a system of non-upgradable smart contracts on the Ethereum blockchain that operates as an automated liquidity protocol with a constant product formula. By putting a priority on decentralization, censorship resistance, and security, it eliminates the need for trusted intermediaries.
Uniswap is a decentralized crypto exchange (or DEX); one of the key components of the DeFi ecosystem. Many of the issues that plague their centralized counterparts, such as the possibility of hacking, poor management, and arbitrary fees, are addressed by DEXs. Although decentralized exchanges have their challenges, one of the biggest challenges is a lack of liquidity, which means there isn't enough money moving through an exchange to make trades faster and more efficient.
Uniswap tries to solve the liquidity problem that decentralized exchanges have by allowing the platform to swap tokens without buyers and sellers having to create liquidity.
In this article, we will take a deep dive into Uniswap by considering what it is, its features, how it works, and lots more.
What is Uniswap?
Uniswap is an Ethereum-based decentralized trading protocol. It is an automated liquidity platform. With Uniswap, executing transactions does not rely on an order book or a centralized party. Hence, users can do business directly with each other. Users can also swap between ERC-20 tokens without using an order book.
There is no listing procedure because of the decentralized nature of the Uniswap protocol. Any ERC-20 token can be released as long as a liquidity pool is accessible to traders. Uniswap thus doesn't impose any listing fees.
The protocol was developed by Hayden Adams in 2018. Vitalik Buterin (Ethereum co-founder) was the first person to talk about the underlying technology of the protocol.
Features of Uniswap
Uniswap distinguishes itself from other blockchain networks through the following key features:
Trading one ERC-20 token for another is simple with Uniswap token swaps. Instead of an order book, Uniswap uses an automated market maker process to get information about rates and slippage in real-time.
A pair of ERC20 tokens can be traded in each Uniswap liquidity pool. The balances of each token in a pool contract are initially zero. Therefore, someone must seed the pool with an initial deposit of each token before it can start enabling trades. The initial price of the pool is determined by this first liquidity provider.
This is a new feature that is seen in Uniswap V2. It allows users to execute arbitrary logic and withdraw up to the entire reserves of any ERC20 token on the platform for no upfront fee.
Oracle is a key DeFi (Decentralized Finance) application component. According to its protocol, the Uniswap team created its own Oracle. Uniswap V2 lets developers make on-chain price oracles that are very decentralized and hard to change. This may meet several requirements for making reliable protocols.
How Uniswap Works
The automated market maker (AMM) technology is the main innovation that enables the protocol to work. AMM controls the Uniswap pools supplying the tokens needed to execute trades. Uniswap's AMM algorithm figures out the real price of a token during a trade based on how supply and demand change between the tokens in these liquidity pools.
When consumers transact with one of Uniswap's liquidity pools, they now pay a transaction fee of 0.3 percent. Each participant in the liquidity pool gets a portion of these costs based on the staked portion of the pool. For instance, if the total fees generated were $200 and you contributed 60% of the liquidity to the pool, you would receive $120. Profits made from transactions are distributed among users (the platform does not collect any transaction fees).
How to Use Uniswap
You need an Ethereum wallet and a small amount of ETH (which you'll need to pay for gas fees) to use Uniswap.
Transaction fees, also known as "gas," are a problem that users of all Ethereum-based applications, including Uniswap, encounter since they can be very expensive. The long-planned switch to the ETH2 blockchain and the more immediate release of a "Layer 2" scaling solution (i.e., Optimism) are attempts aimed at addressing this issue.
Uniswap V3 was launched in May 2021 to make transactions more efficient and cheaper.
UNI, a native governance token with a market cap of about $3.49B, that enables more community involvement and monitoring, was introduced by Uniswap in September 2020. Owners of UNI may vote on the different developments taking place on Uniswap projects. In addition, UNI holders can use the token to finance grants, collaborations, liquidity mining pools, and other growth-oriented projects that increase Uniswap's utility and scope.
The founding team will have a smaller involvement in platform governance as the Uniswap community expands and diversifies UNI holdings. This shows that Uniswap is following the core ideas of the DeFi revolution, which are decentralization and aligning incentives.
Investors can also trade UNI on exchanges and treat it as a speculative investment even though it is a governance token.
Liquidity mining contributes to some of the tools used for community distribution. This means that people who offer liquidity to the following Uniswap pools will receive UNI:
The Uniswap community comprises Ethereum addresses that have engaged in transactions with Uniswap contracts.
How You Can Claim UNI (Uniswap Tokens)
Those that have used Uniswap can claim about 400 UNI tokens for each address they used Uniswap with. Here are the steps you can take to claim your UNI:
- Visit https://app.uniswap.org/.
- Connect the wallet that you previously used for Uniswap.
- Click "Claim your UNI tokens."
- Verify the transaction in your wallet.
- That’s all. You are now a Uniswap token (UNI) holder.
Uniswap is an innovative DEX (decentralized exchange) that is based on Ethereum. One of the advantages of Uniswap is the fact that funds are not transferred to any middleman. This means transactions are not prone to any counterparty risk since users can directly trade from their Ethereum wallets.
Although it has obvious drawbacks, this concept could have some fascinating ramifications for the development of trustless swapping of tokens. Uniswap might benefit from Ethereum 2.0 scaling once it is live on the network.