Uniswap was launched in 2018 and is one of the first decentralized exchanges to gain prominence on the Ethereum network. There are other decentralized exchanges like SushiSwap and Curve but Uniswap is the most popular.
Uniswap took the automated market-maker model mainstream. In this model, users supply ETH tokens to liquidity pools, and algorithms set prices based on supply and demand. Users can earn crypto rewards by supplying crypto tokens to the liquidity pools and also enable peer-to-peer trading. There are hundreds of crypto tokens available on Uniswap to trade; USDC and Wrapped Bitcoin (WBTC) are some of the most popular trading pairs on the crypto exchange.
How does Uniswap work?
Automated liquidity protocol
Uniswap uses an automated liquidity protocol to address liquidity. This protocol functions by incentivizing users trading on the crypto exchange to become liquidity providers (LPs). Users pool their tokens together to create a fund to execute trades on the Uniswap platform. Each crypto token has its pool that users contribute to. The crypto token prices are determined by an algorithm. In this protocol, users do not have to wait for other parties to appear to complete a trade. Users can trade instantly at a known price provided there is enough liquidity in the crypto token pool.
In exchange for investing their funds, each liquidity provider receives a crypto token based on their staked contribution to the liquidity pool. For example, if a user contributed $5,000 to a liquidity pool that held $100,000, the user would receive a token for 5% of that pool. Users can redeem this token for a share of the trading fees. Uniswap charges users a 0.30% fee for every trade made on the platform and sends it to a liquidity reserve. When an LP decides to exit, they receive a portion of the total fees from the liquidity reserve relative to their staked amount.
How is the crypto token price determined?
Uniswap uses an automated market maker (AMM) system to set crypto token prices instead of using an order book system where the price is determined by the highest buyer and lowest seller. The AMM system is based on the supply and demand of crypto and uses a mathematical algorithm. This system sets the price of a crypto token based on the ratio of how many crypto tokens are in the respective pool.
Users add a certain amount of the ERC-20 crypto token and an equal amount of another ERC-20 crypto token if they wish to add a new ERC-20 crypto token to Uniswap. X*Y=K is the equation used to set the price of each crypto token. X is the amount of crypto token A, and Y is the amount of token B, K is a constant value that does not change.
How does Uniswap make money?
Uniswap is a decentralized protocol where no one group or central entity wants to make a profit. So Uniswap does not earn money; all fees are distributed to LPs who help the platform function.
How to use Uniswap?
Users need an Ethereum wallet and tokens to use the Uniswap platform. You can access app.uniswap.org through your web browser to either supply liquidity or swap crypto tokens. Uniswap v3 was launched in May 2021 to make transactions cheaper and faster.
Uniswap pros and cons
Pros
- Passive income: You can earn passive income by becoming a liquidity provider on the Uniswap platform. This platform can be an alternative investment, as you can earn LP rewards in the form of crypto tokens.
- Ethereum-based: The Ethereum network is the most popular blockchain for Defi and other dApps. Users can make use of the Uniswap platform to fully utilize the Ethereum network.
- Decentralized: No individual or central entity controls the Uniswap platform, making it a completely decentralized protocol. This platform is maintained by its large, robust community.
Cons
- Complications with Ethereum: The Ethereum network might be one of the most popular blockchains, but it has a few issues that it hopes to resolve after its Ethereum 2.0 upgrade, such as network congestion and high fees for users.
- Unclear returns: The liquidity pools of Uniswap do not mention the returns you can make, which makes it difficult for new investors to evaluate them.
What Makes Uniswap Special?
Many features make Uniswap unique. Any ERC-20 crypto token can be listed on the Uniswap platform. Users do not need anyone’s permission to list their crypto tokens. Users can create a liquidity pool with equal amounts of the new token and another ERC-20 token.
The other unique feature is that this platform uses a pricing model with the equation x*y=k. X and Y are the quantities of crypto tokens in the smart contract, while K is a fixed constant in the pricing model. The price of a crypto token is based on the ratio of crypto tokens in the smart contract.
Conclusion
Uniswap is an innovative, decentralized exchange built on the Ethereum blockchain. This platform enables any user with an Ethereum wallet to exchange crypto tokens without intermediaries. Uniswap does have its limitations but can prove to be a prolific platform for trustless crypto token swapping. Uniswap is the most popular decentralized exchange for crypto coins on the Ethereum network and has a large user base. Crypto investors are attracted to this platform due to its innovative protocol that offers a unique opportunity to earn passive income.
You can now trade Uniswap(UNI) tokens on ZebPay. Stay up to date with the latest crypto news on ZebPay blogs.
Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Each investor must do his/her own research or seek independent advice if necessary before initiating any transactions in crypto products and NFTs. The views, thoughts, and opinions expressed in the article belong solely to the author, and not to ZebPay or the author’s employer or other groups or individuals. ZebPay shall not be held liable for any acts or omissions, or losses incurred by the investors. ZebPay has not received any compensation in cash or kind for the above article and the article is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.
