Coin Insights: What Is Uniswap?

Uniswap-logo

Like the mythical unicorn, Uniswap is a one-of-a-kind creature. In fact, it’s the first fully decentralized exchange ever built. It was launched in 2018 by a young college dropout named Hayden Adams, who learned to write smart contracts (computer codes for developing blockchains) while he was developing Uniswap. Prior to this point, Adams had no experience with developing blockchain.

In this article, we’ll go more in-depth about Adams and what led up to building one of the premier decentralized exchanges in the cryptocurrency industry. But first, what is Uniswap all about?

What is Uniswap?

Uniswap is a decentralized exchange (DEX) that officially commenced trading on its platform in November 2018. It was created as a tool for cryptocurrency investors to trade tokens without platform fees and without the permission of a central authority that is needed when dealing with traditional exchanges. 

As an example, imagine a situation where you need to sell something of value. Let’s say your car in this instance because you need to extract liquidity (cash) for things you need to buy. But before you can sell your car, you need to get permission from the car manufacturer, because, well, they made the car. Naturally this would make the sale of the car far more difficult. Without the car manufacturer in the picture however, you’d be able to easily sell the car to whomever you want, when you want, without anyone’s permission.

If we take this analogy and apply it to cryptocurrency trading you’ll notice the similarities. 

Before decentralized exchanges, all trades facilitated on any trading platform or exchange required a third party, known as a market maker, to make the trade happen. As an example, Coinberry is a centralized trading platform. This means that you buy and sell with Coinberry directly, rather than with others in the marketplace. 

This centralization comes with a number of fantastic benefits, as being regulated by the Canadian government gives all investors on our platform additional safety, security, and confidence – which decentralized exchange don’t always have.

But the idea of centralization, in terms of controlling the ability to buy and sell does still apply here. You need a centralized platform to facilitate the trades between both the buyer and seller. You need a ‘market maker’ to help make a market for buyers and sellers.

Fully decentralized exchanges on the other hand, don’t need a third party or ‘market maker’ to facilitate trading. 

market making

This is what the daily life of a market maker looks like
Courtesy of Wikimedia.org

The Uniswap protocol was the first of its kind to remove third parties (market makers) from the equation of trading digital assets. This means there isn’t another physical entity or person to facilitate the trade. 

How Uniswap Works

Decentralized exchanges use what is known as automated market makers (AMM). AMM’s use a predetermined math equation to determine the price at which an asset is sold. This is set in place by a smart contract. Instead of an actual person working as the maker, the smart contract automatically facilitates the trade because it knows how to determine the price. As a result, automated market makers can work in real time and determine a price like a counterparty would on a traditional exchange.

This wouldn’t be possible without liquidity pools, though. Liquidity pools are innovative in terms of how they decentralize the trading process, and are just a fancy way of saying “a bunch of digital assets thrown together, that other users can access for a fee”.

Uniswap incentivizes holders of tokens to lend their assets to a liquidity pool to be on reserve whenever anyone wants to buy it. Whenever new tokens are added to the liquidity pool, the lender to the pool collects a “pool token.” Anyone who wants to buy said token doesn’t need a market maker to find a seller that matches their buy order. The liquidity pool has a reserve on hand, ready to go out immediately. 

But wait, why would anyone want to lend out their tokens to a pool though? 

When liquidity is ‘staked’ in a liquidity pool, the smart contract agrees to pay the lender a specific APR (annual percentage rate) for their service of lending out the assets they own. 

In this way, the fees you pay on Uniswap go to liquidity providers (other individuals), who make the market liquid for everyone to use. In this way the fees go to the individuals, rather than the platform itself. 

Unfortunately, there are expensive gas fees on Uniswap, mainly a problem of the extremely high Gas Fees that Ethereum currently has. This is expected to be solved when Ethereum changes how it verifies transactions, which the Ethereum foundation has estimated will take place sometime in 2022. When this finally happens, the gas fees on Uniswap will be insignificant, allowing users to transact more freely on the platform. 

Who created Uniswap?

While Hayden Adams was living at his parent’s place, he did two things that would change his life forever. He learned how to code, and he purchased his first Ethereum tokens.

The initial idea for creating an AMM decentralized exchange maker came from Hayden’s university friend, Karl, who was impressed by one of Vitalik Buterin’s blog posts on Reddit. The post described a theory behind a constant product market maker. That’s when Adams got to work and became the driving force in building the world’s first fully decentralized automated market maker exchange. In 2017, Uniswap was founded.

Uniswap: where is it heading?

The UNI token was one of many tokens whose price declined when China banned all cryptocurrency trading and services in September 2021. However, it was announced in the first week of October that Grayscale, a digital currency investment service, would add Uniswap’s UNI governance token to their large-cap investment fund. This could bring more mainstream exposure to Uniswap. 

Uniswap just released version 3 of their decentralized application (dApp) last summer. It allows liquidity providers to control where their funds are allocated and compensates them appropriately for differing levels of risk.

This truly decentralized exchange has already changed the game of digital finance and now is rewriting the contracts for a decentralized financial future. 

To stay up to date with Uniswap’s price, you can refer to our Coinberry price page below in the resources section.

Uniswap (UNI) Links & Resources

Uniswap.org

Uniswap Whitepaper

Cryptocurrency prices at coinberry

Uniswap Price

Uniswap (UNI) References

Coindesk.com

Hayden Adams: King of the DeFi Degens

Decrypt.com

https://decrypt.co/resources/what-is-uniswap

Cointelegraph.com

https://cointelegraph.com/explained/uniswap-and-automated-market-makers-explained