- Uniswap has emerged as a leading decentralized exchange with many merits.
- The platform gives many benefits to its users.
Crypto users and enthusiasts know Uniswap as one of the leading decentralized exchanges. While major exchanges like Binance and Coinbase are centralized, Uniswap emerges as a potential option for decentralization supporters. Using the Ethereum network rules out the involvement of any third party.
The DEX has many merits that one can talk about. So let’s explore all the aspects of Uniswap and figure out why it’s worth the discussion.
Uniswap: A Brief Description
The fact that it was built using the Ethereum blockchain makes it compatible with many tokens. It was introduced in 2018 to popularize open-source trading marketplaces. Since it’s an open-source platform, anyone can copy its code to create their platform. Above all, it doesn’t charge users a dime for listing their tokens on it.
On the other hand, regular centralized exchanges charge a hefty sum for it. With a decentralized system, Uniswap establishes a fair system for controlling the funds. It does away with keeping the control to one entity and distributes it among all using private keys. Bringing private keys into the scene reduces the chances of asset losses to a great extent.
Reportedly, Uniswap is currently the fourth-largest DeFi platform in the world. It has crypto assets worth $3 Billion locked in its network.
Here’s How Uniswap Works
Uniswap deploys an all-new trading model called automated liquidity protocol. It solves the liquidity problem that centralized platforms come across so often. Under this model, the network incentivizes people to become liquidity providers (LPs).
The users of this platform create a pool that supports all the major trades. Using a math algorithm, the ecosystem determines the price for each token.
In exchange for providing liquidity, the LPs receive some portion of the staked pool. It should be noted that Uniswap charges a flat fee of 0.30% for every trade. The amount collected goes to the liquidity reserve.
Liquidity providers receive a portion of it when they exit the network. After the Uniswap v.2 upgrade, a new protocol for fees was implemented. According to it, the fee can be turned on or off with a community vote.
Token Price Determination
The way Uniswap determines its token price also makes it very unique. Usually, exchanges use an order book system in which the highest buyer and lowest seller decide the price. However, Uniswap makes use of an automated market maker (AMM) in the picture. This alternate method uses a long-standing mathematical equation. It ascertains and adjusts the price based on the demand and supply of that asset.
The system analyzes the amount of coins in the respective pool and then tweaks the price. At the same time, Uniswap has a sophisticated system for adding tokens. Those who want to do it need to have a certain amount of ERC-20 tokens.
The same amount of ERC-20 tokens is required to start a liquidity pool. The size of the pool also plays a pivotal role in fixing the price of the token. For users, having more liquidity translates into enjoying larger trades.
The Arbitrage Factor
In the Uniswap ecosystem, arbitrage traders play an instrumental role too. These traders hold expertise in finding price anomalies across multiple exchanges. With their knowledge, they find discrepancies and turn a profit.
For instance, Ethereum is selling at $35,450 on Coinbase and at $35,500 on Binance. The arbitrage traders will buy the crypto from Coinbase and sell on Binance.
By finding loopholes, these traders can make sizable profits while minimizing risks. On Uniswap, these traders find tokens that are selling above or below the market price. The traders continue this practice unless the asset price is in line with other exchanges. This arrangement between arbitrage traders and AMM keeps the Uniswap price stable.
Using Uniswap
To use Uniswap, users need to have an ERC20-compatible wallet. For instance, wallets MetaMask, Fortmatic, Coinbase Wallet, or WalletConnect. The owners of these wallets need to add Ether to pay for gas. The fee for gas depends on the number of people using the network. The users will enjoy all the services the ERC20 wallets deliver. They get to use the slow, medium, or fast options for making transactions.
Introduction to UNI Token
Like all the other exchanges, Uniswap also has its native token called UNI. With this token, the network members get the right to vote on new proposals. They even have a say on how tokens should be minted and distributed. The Uniswap developers were created in 2020 as an alternative to rival DEX SushiSwap. The former created 1 Billion tokens and distributed 150 Million of them.
For the true decentralized fans, Uniswap is the right choice. As the significance of decentralization grows, the influence of Uniswap will also increase. However, the dominance of centralized exchanges continues with so many merits. So it’s hard to tell if Uniswap will make DEXs more prominent. The decentralization enthusiasts certainly hope so.