Uniswap Review: All About the Exchange and UNI Token Explained
Uniswap is a decentralized exchange (DEX) that enables users to fund liquidity pools and mint profits. Let’s get started with our extensive Uniswap Review.
The platform allows users to trade Ethereum-fueled ERC-20 tokens through its user-friendly web interface. In the past, decentralized exchanges had short order books and abysmal UXs, leaving an immense scope for effective decentralized exchange.
Thanks to Uniswap, users now don’t need to bear flaws as they get to trade Ethereum-based protocols using a web 3.0 wallet easily. You can do so without depositing or withdrawing to a centralized managed order book. Uniswap provides users with an opportunity to trade without any third-party involvement.
Undoubtedly, Uniswap tops the chart when it comes to popular DEXs despite its competition with other exchanges. On it, users are one snap away from exchanging an ERC-20 token without worrying about phishing, custody, and KYC protocol.
Moreover, Uniswap offers independent on-chain transactions at low costs, all thanks to the smart contracts running on the Ethereum network.
Its fundamental mechanism makes Uniswap’s liquidity protocol to have a lesser impact on the price for most transactions. Currently, Uniswap functions on the V2 upgrade that came in May 2020.
V2 upgrade includes Flash Swaps, price oracles, and ERC20 token pools. The V3 upgrade is about to go live later this year in May, aimed to be the most efficient and effective AMM protocol ever designed.
Following the launch of SushiSwap last year, Uniswap introduced its governance token dubbed UNI that governs protocol changes.
Hayden Adams founded Uniswap in 2018. Hayden was a young independent developer at that time. After receiving $100k from the Ethereum foundation, Hayden successfully built an effective decentralized exchange that gained significant growth after its launch, alongside his small team.
Earlier in 2019, Paradigm closed a $1 million seed round with Uniswap. Hayden used that investment to release V2 in 2020. Uniswap has raised $11 million from multiple seed rounds, making it the top project on Ethereum.
How Uniswap Works?
Being a decentralized exchange, Uniswap excludes centralized order books. Instead of highlighting specific prices to buy and sell. Users can insert the input and output tokens; meanwhile, Uniswap highlights the reasonable market rate.
You can use a web 3.0 wallet such as Metamask to conduct the trade. At first, select the token to trade and the token you want to receive; Uniswap will instantly process the transaction and automatically update your wallet’s current balance.
Why Should I Choose Uniswap?
Thanks to its easy-to-use functions and marginal fees, Uniswap beats other decentralized exchanges. It does not require native tokens, no listing fees, and low gas cost compared to other decentralized exchanges on the Ethereum network.
The project has an inherently permissionless nature that allows users to develop the ERC-20 market as long as they amount equivalent to Ethereum to support it.
Probably, you’ll be wondering what makes Uniswap different from other DEXs out there, and below we outline its valuable features that have gained tremendous traction lately.
What Uniswap Offers?
You get to trade any Ethereum-based token. The platform neither charges the listing process nor a token listing fee. Users instead trade tokens in a liquidity pool that determines which token to list.
The v2 upgrade allows users to merge two ERC20 tokens in a trading pair without using ETH. There are some exceptions as not all trading pairs are available. According to CoinGecko, Uniswap’s reach of over 2,000 trading pairs surpassed all other exchanges.
Uniswap does not hold funds in custody: Users worried if the exchanges will store their funds don’t need to fret. The Ethereum-based smart contracts control users’ funds entirely, and they monitor every single trade. Uniswap produces separate contracts to handle trading pairs and support the system in other aspects.
It shows that funds go into the user’s wallet after every trade. There’s no central body to seize your funds, and users don’t have to provide identification to create an account.
No involvement of central authorities: Unlike the traditional financial system, there is no central body to control prices. Its liquidity pools implement formulas based on token ratios. To prevent price manipulation and generate reasonable prices, Uniswap uses the oracles.
Liquidity providers: Users can mint profits from UNI fees by simply staking tokens in Uniswap liquidity pools. Projects can invest in liquidity pools to support trading.
On the exchange, LPs can provide capital to any specific pool but must first submit collateral to each of their targeted markets. For instance, a user interested in the DAI/USDC market must provide equal collateral to both markets.
After providing the liquidity, a user gets what’s known as “liquidity tokens.” These LTs show the portion of the user’s investment into the liquidity pool. He/she is also free to redeem the tokens for the collateral backing them up.
As for fees, the exchange charges every user up to 0.3% of every transaction. These fees help to ensure deeper spreads on the board. However, there are three different levels of fees on the exchange. These fees come in three, namely, 1.00%, 0.30%, and 0.05%. The liquidity provider can decide on the tier to invest in, but traders often go for the 1.00%.
Trader: Uniswap operates by creating outstanding markets for two assets through liquidity pools. By abiding on set protocols, Uniswap uses an automated market maker (AMM) to reach the end-user with its price quotations.
Since the platform will always ensure liquidity, Uniswap involves the use of the ‘Constant Product Market Maker Model.’ This is a variant with a special feature for constant liquidity irrespective of a tiny liquidity pool or the largeness of the order size. This implies a simultaneous increase in both the spot price of an asset and its desired quantity.
Such an increase will stabilize the system on liquidity though larger orders may be affected by the increment in price. We can conveniently state that Uniswap keeps a balance in the aggregate supply of its smart contracts.
Marginal Fees: Uniswap charges 0.3% per trade, which is close to what other cryptocurrency exchanges charge. Such crypto exchanges charge around 0.1%-1%. Most importantly, the fee per trade surges when the Ethereum gas fee rises. Thus, Uniswap tends to find an alternative to this issue.
UNI Withdrawal Fees: Every exchange in the crypto market charges users specific amounts of withdrawal fees depending on how they operate. However, Uniswap is different. The exchange charges users only the normal network fees that follow the execution of a transaction.
Usually, the withdrawal fees based on the “Global Industry BTC” is usually 0.000812 BTC for every withdrawal. However, on Uniswap, expect to pay a 15-20% average BTC withdrawal fee. This is a good bargain, and that’s why Uniswap is popular for favorable fees.
Introduction to Uniswap Token (UNI)
The decentralized exchange, Uniswap, launched its governance token UNI on 17th September 2020.
Uniswap didn’t run a token sale; instead, it distributed tokens as per the release. After the launch, Uniswap airdropped 400 UNI tokens worth $1,500 to users who had used Uniswap in the past.
Nowadays, users can earn UNI tokens by trading tokens in liquidity pools. This process is called yield farming. Uniswap token holders have the authority to vote on their development decisions.
Not just that, they can grant funds, liquidity mining pools, and partnerships. Uniswap (UNI) token witnessed huge success after getting placed in the top 50 DeFi coin in a few weeks. Moreover, Uniswap (UNI) ranks first on the DeFi chart as per the market capitalization.
UNI token is trading at $40, And it is projected to reach $50 in the few days to come. With loads of investment and use cases, UNI is supposed to skyrocket in the near term.
Approximately 1 billion UNI tokens have been generated at the genesis block. Among which, 60% of UNI tokens have already been divided into Uniswap community members.
In the next four years, Uniswap tends to devote 40% of UNI tokens to the advisory board and investors.
The UNI community distribution happens through liquidity mining, meaning that users providing liquidity to the Uniswap pools will receive UNI tokens:
Being the most popular DEX, Uniswap serves as a converging platform for many users to earn profits from a liquidity pool. Their earning is through staking of their tokens. It was in September 2020 popularity surge that Uniswap got its current locked value from investors’ deposits.
You must understand that a rise in participation in a blockchain project is not a measure of profitability. Usually, in a liquidity pool, the standard trading fee of 0.3% is shared among all the members. For a pool to be more profitable, it should have very few liquidity providers but more traders. Investing in such a pool will yield more profit than others below this standard.
However, just like in every other transaction in life, this investment opportunity has its own risk. As an investor, there’s every need to regularly estimate possible losses from changes in the value of the token you stake with time.
Usually, you can estimate your possible losses of the token you stake. A simple comparison of these two parameters is a good guide:
- The current price of a token is a percentage of its initial price.
- The change in the total liquidity value.
For instance, a change in the value of a token by 200% on the first parameter gives a 5% loss on the second parameter.
Uniswap Capital Efficiency
The upcoming upgrade of Uniswap V3 comprises significant changes related to capital efficiency. Most Automated Market Makers are capital-efficient because the funds in them are stagnant.
In essence, the system can support big orders at a hefty price if it has more liquidity in the pool, even though liquidity providers (LPs) in such pools invest liquidity in a range of 0 and infinite.
The liquidity rests being reserved for an asset in the pool to grow by 5x-s, 10x-s, and 100x-s. When it happens, the sluggish investments ensure that liquidity remains on the part of the price curve.
Hence, this proves there is a small amount of liquidity where most of the trading takes place. For instance, Uniswap does $1 billion of volume each day even though it has $5 billion in liquidity locked.
It is not the most agreeable part for users, and the Uniswap team has similar thoughts. Therefore, Uniswap tends to eliminate such practice with its new upgrade V3.
As V3 goes live, liquidity providers will be able to set custom price ranges for which they aim to provide liquidity. The new upgrade will lead to intense liquidity in the price range where most trading occurs.
Uniswap V3 is a rudimentary attempt to create an on-chain order book on the Ethereum network. Market makers will provide liquidity in the price range they select. Most importantly, V3 will favor market makers by profession over the retail customers.
The best use-case for AMMs is to provide liquidity, and anyone can put their money to work. Such a wave of complexity, “Lazy” LPs, will earn lesser trading fees than professional users that always outline new strategies. Aggregators like Yearn.Finance now offers LPs a relief of remaining somehow competitive in the market.
How Uniswap Makes Money?
Uniswap does not make money from its users. Paradigm, a cryptocurrency hedge fund, backs Uniswap. The entire fee generated goes to liquidity providers. Even the founding members do not receive any cut from the trades happening through the platform.
Right now, liquidity providers receive 0.3% as transaction fees per trade. The transaction fee is added to the liquidity pool by default, although liquidity providers can exchange at any time. These fees are distributed to the liquidity provider’s share of the pool accordingly.
A minor portion of the fee goes to Uniswap development in the future. Such a fee helps the exchange strengthen its functions and deploy an excellent service. Uniswap V2 is the perfect example of enhancement.
Previous UNI Disputes
In the history of Uniswap, there has been some exploitation of minor tokens. It’s still uncertain if the losses are deliberate thefts or circumstantial risks. Around April 2020, $300,000 to $1 million in BTC was reported stolen. Also, in August 2020, some Opyn tokens worth over $370,000 were reported stolen.
There are also issues associated with the open listing policy of Uniswap. The report has it that fake tokens were listed on Uniswap. Some investors erroneously ended up buying those fake tokens, and this created wrong public opinions concerning Uniswap.
Though nobody can ascertain if Uniswap has the intention of blacklisting those fake tokens, the investors can devise a means to evade such reoccurrence. Through the use of Etherscan block explorer, the investors can make a thorough inspection of any token IDs.
Also, there’s the argument not being as decentralized as Uniswap claims that its token distributions are. This can pose a huge challenge for anyone who is not very familiar with cryptocurrency.
Many people are often worried about the state of security on every exchange. But when it comes to Uniswap, you can rest assured that they got you covered. The network servers are spread out to different locations. This is why people prefer decentralized exchanges over their centralized counterparts.
By spreading out, the exchange is ensuring that its servers will run continuously. Also, this approach protects the exchange from cybercriminals attacks on its servers. If they were more concentrated, it’d be easy for miscreants to compromise them. But since the servers are not in a place, even if attackers succeed with one of them, the exchange will keep running without any glitch.
Another good thing to note about security on Uniswap is that the exchange doesn’t touch any of your assets, no matter the trades you make. Even if hackers manage to compromise all the servers and get to the exchange, your assets will remain safe because they’re not held on the platform.
This is another aspect to commend about decentralized exchanges. They’re better than centralized exchanges in this regard because if a hacker breaks into such platforms, they can steal your assets on the platform unless you’ve withdrawn all after trading, which may be unlikely.
Living in an era where obstacles and barriers keep preventing a product from reaching its full potential, Uniswap has undeniably provided an exchange that traders have been needing for so long.
Being the most popular exchange, Uniswap provides convenience to Ethereum investors. Its liquidity pools are highly appealing to folks wanting to mint profits on their holdings. Uniswap has certain limitations though.
It does not allow investors to trade non-Ethereum assets or spend fiat currency. Users can wrap crypto coins like Bitcoin (WBTC) and trade through Uniswap. The founder, Hayden Adams, has made a killer project with just $100k.
As V3 goes live, Uniswap’s native token UNI will more likely surge and surpass its previous all-time highs. Lastly, you can make profits by just investing in Uniswap; click below to buy Uniswap.