How was Uniswap Created?
Uniswap was created in November 2018 by Hayden Adams, who had been a mechanical engineer at the German corporation Siemens. He wanted to create a decentralised, deregulated exchange ( a DEX) that did not require users to make a deposit before using it nor open an account and provide sensitive, personal information.
Uniswap’s reliance on mathematical models and liquidity pools rather than last trade prices and order books such as those used by Bitcoin has proven very successful and it has in turn received financial backing from large venture capital firms.
Uniswap is a decentralized finance protocol that’s used to exchange cryptocurrencies. It is also the name of the company that built the Uniswap protocol. The protocol facilitates automated transactions between cryptocurrency tokens on the Ethereum blockchain using smart contracts.
Hayden Adams initial version was published to the Ethereum mainnet on November 2nd 2018. The protocol was launched on the last day of the Devcon 4 conference and it quickly gained a lot of traction, resulting in an initial seed investment to fund work on the second version. Uniswap V2 was launched in May 2020, and in September the new crypto token called UNI was launched.
How does Uniswap work?
Uniswap runs on two smart contracts simultaneously, an ‘Exchange’ contract and a ‘Factory’ contract. These are essentially a sort of automatic computer program designed to perform specific functions when certain conditions are met. In other words, it could be described as an automated liquidity protocol.
Better known in the space as as an automated market maker (AMM). A decentralized exchange is one that doesn’t have a central authority managing orders. AMMs accomplish this by using smart contracts (programs written on the blockchain) to set prices and execute trades. In doing so, they’re able to offer decentralized financial services otherwise known as DeFi services.
What are AMMs?
AMMs like Uniswap can provide crypto trading because of their liquidity pools. A liquidity pool is a pool of crypto funds, contributed by users, locked in a smart contract. Funds from the liquidity pool are used when people want to trade crypto.
Uniswap takes a small fee from every transaction and distributes it among a pool’s liquidity providers (the people who have deposited their crypto into the pool). It’s a mutually beneficial relationship. Uniswap is able to offer crypto trading because of its liquidity providers. The liquidity providers earn crypto because they receive a cut of the exchange’s transaction fees – so you can see the protocols’ appeal a the outset.
It is powered by a system of non-upgradeable smart contracts, on the Ethereum blockchain. Uniswap is open-source software licensed and each smart contract manages a liquidity pool comprising two ERC-20 tokens (a type of token in Ethereum).
What are the constituents of Uniswap?
As the native token of the Uniswap decentralized exchange, UNI is the token that powers the DEX. It is awarded to investors who stake their assets, and also acts as a governance token.
A governance token effectively gives holders voting rights on issues concerning the DEX. This allows owners of UNI to participate in decisions on how the network operates and benefit from the rising value of decentralized exchanges over time. You could say in some sense that the more you own the more you get. For example; UNI holders who hold 1% or more of the total UNI supply even have the opportunity to submit development proposals. In essence, the value of UNI tokens correlates with the inherent value investors receive with the Uniswap exchange. Perhaps a posh and lateral way of saying that you get what you pay for. Or at least more of a say.
What makes Uniswap popular?
Uniswap is unlike other cryptos because, technically, it is more of an exchange platform more than a standalone crytpo. UNI can be held and traded but its main use is as a liquid intermediate asset in exchange transactions.
With a market capitalisation of around US$5.1 billion, Uniswap is currently in the ‘top 20 most valuable’ digital asset class. Currently, there are circa 746 million UNI coins in circulation and the maximum supply of UNI coins are capped at 1 billion so there’s clearly an appeal amongst the masses.
Following broader crypto trends, the UNI price rose sharply at the beginning of 2021 and touched a record high of $45.02 in May of 2021. Since then prices have declined drastically by around 85% with its current trading position as of August 2022 at sub $7.
Most traders, however, are still quite bullish on the prospects of Uniswap with some maintaining that the price will surge to as high as US$80 in the next five years. Overly optimistic? Well, maybe but it is a developing protocol and sits within the current market that is witnessing a severely bearish sentiment on the whole.
Decentralized exchanges have come under severe scrutiny by regulators, who are gunning to enforce regulations, centralization, and ultimately, the demise of DEX. Whether the Securities and Exchange Commission (SEC) or any regulatory body cracks down (or at least successfully) on Uniswap or any of its peers in a meaningful way remains to be seen. Naturally, if the Uniswap DEX comes under attack, the token’s price will plummet, leading to substantial investment losses.
Uniswap compared to Ethereum
The use cases, market caps and so on, are of course very different when making this almost misplaced comparison. However, the one similarity between ETH, Ethereum’s native token, and the UNI token are that both operate on Ethereum’s blockchain architecture.
However, ETH operates on Layer 1, while UNI operates on Layer 2; Layer 1 network referring to a blockchain, while a Layer-2 protocol is a third-party integration that can be used in conjunction with said Layer-1 blockchain. As a solution, developers create Layer-2 protocols that rely on the Layer-1 network for consensus and security.
ERC20 is a standard used for creating and issuing smart contracts on the Ethereum blockchain. The majority of tokens on Ethereum’s Layer 2 are in fact, ERC20 tokens. That’s why unfortunately users of Uniswap DEX need to pay gas fees with ETH to some frustration. But at least the frustration is expected with any Ethereum based transaction.
Uniswap can be found on major world wide exchanges. This is considered by some to be of critical importance since the exchanges are trusted by millions of us who buy, sell, and hold digital assets long-term.
The Uniswap exchange doesn’t require more government-issued cards for ID purposes and due to its decentralized nature, the process that an exchange takes known as ‘Know Your Customer’ is nonexistent. This means that as long as you have money you are ready to purchase and sell ERC20 tokens. In centralized exchanges some ID verification can take several hours or several days to complete so its appeal is somewhat limited should an investor wish to move quickly.
Uniswap unveiled another upgrade to stay on top of DeFi in May of 2021. Uniswap say that the goal is to make Uniswap the most flexible and efficient automated market maker ever designed. The features of the automated market maker are unique with Uniswap and like others such as Sushiswap and 1 Inch runs on the network as an ERC20 token and enables the exchange of Ethereum-based assets for several crypto natives.
Uniswap underwent an extensive review on the dev community in the finance space. The conclusion was a that it has secured smart contract coding and is a non-custodial platform that gives the users control over their wallets and private keys. Not a bad review!
Decentralization is the hallmark of the crypto finance space as millions of people are drawn to its offerings as there are no intermediaries so control is in the hands of the community. A refreshing alternative to greedy intermediaries.
Uniswap faces competition from other DEXs on Ethereum like SushiSwap, Curve, and more. Such as the arrival of Internet Computer (ICP) – a set of protocols that allow independent data centers around the world to band together and offer a decentralized alternative to the current centralized internet cloud providers – essentially decentralising the internet.
Should I invest in Uniswap?
As ever we do not provide financial advice. However investors with a crypto wallet who want to swap tokens or earn interest with liquidity mining should find UNI to be a viable option as a service or as an addition to their portfolio.
But as with so many things in life to every Yin there must be a Yang. With that in mind what are the Pros and Cons of Uniswap?
The advantages of Uniswap
- Swap ERC-20 tokens
- User-friendly design
- Earn crypto with liquidity mining
- No registration required, no KYC
- Crypto wallet support
The disadvantages of Uniswap
- Doesn’t accept fiat money
- Gas fees
- Risk of impermanent loss
- No KYC
As always we should educate ourselves about an asset before investing and that includes thinking about what you can do with your UNI token. You can choose the add liquidity option to lend crypto to any liquidity pools with the UNI token option.
Be aware that investing in any asset including crypto is not without its risks and Funganomics® certainly do not claim to provide financial advice within this article. Investors should approach these assets like any other technological investment, with a long-term mindset and to expect the volatility of ups and downs.
Although the current UNI price may be low perhaps that presents us with the right opportunity given its development, adoption and market potential.