What is Uniswap (UNI)?
Uniswap is an exchange that is fully decentralized - meaning it is not owned and operated by a single entity - and uses a relatively new trading model called the Automated Liquidity Protocol. The Uniswap platform was built in 2018 on top of the Ethereum blockchain, the second-largest cryptocurrency project in the world by market capitalization, which makes it compatible with all ERC-20 tokens and infrastructure (wallet services such as the Bitcoin.com Wallet, MetaMask, etc.).
By being a DEX (Decentralized Exchange), users always maintain full control of their funds. This means users can make trades without giving up control of their private key. By contrast, in the centralized exchange model, a third party takes custody of users' funds, creating a single point of failure.
Read more: What is Defi?
How does Uniswap work?
Uniswap runs on two smart contracts: the "Swap" contract and the "Factory" contract. These are automated programs designed to perform specific functions when certain conditions are met. The Factory smart contract is used to add new tokens to the platform, while the Swap contract facilitates all token exchanges. Any ERC-20 token can be exchanged with any other ERC-20 token on the Uniswap platform.
Uniswap's Automated Liquidity Protocol (ALP) is the first working decentralized automated market maker (AMM). An AMM incentivizes the creation of pools of liquidity. The incentive takes the form of fee sharing. Specifically, people who add liquidity to a Uniswap trading pair receive a share of the fees generated when other participants trade that pair.
Uniswap's ALP also enables the assets in liquidity pools to be algorithmically traded, ensuring that a healthy balance of each asset is maintained.
Read more: Dive deeper into the function of AMMs.
History of Uniswap
The design of Uniswap can be traced back to Ethereum co-founder Vitalik Buterin's October 2016 Reddit post titled "Let's run on-chain decentralized exchanges the way we run prediction markets," an article that described a prototype of a blockchain-based decentralized exchange.
In late 2017, Hayden Adams, the founder of Uniswap, who had only been learning to develop smart contracts for two months at the time, began developing Uniswap as described in Buterin's post. In August 2018, Uniswap received $100k in funding from the Ethereum Foundation. In November, the team deployed Uniswap v1. In May 2020, the team launched Uniswap v2, and V3 was released in May 2021.
While Uniswap v1 only accepts ERC-20↔ETH pools, Uniswap v2 enables ERC-20↔ERC-20. In V3, new features such as fee tiers, concentrated liquidity, and oracles collectively improved capital efficiency but made it harder for non-professional participants to profit from providing liquidity to the exchange.
As of 2022, Uniswap is now among the top three decentralized exchanges in terms of trading volume.
How can you use Uniswap?
- Create markets: You can use smart contracts to create new markets for exchanging new pairs of digital assets.
- Swap assets: You can use the platform to swap digital assets, via decentralized markets that have already been created.
- Earn rewards: You can provide liquidity by staking—agreeing to not trade or sell—your digital assets. Those who stake their cryptoassets Uniswap liquidity pools are rewarded with UNI but are at risk of losing value due to impermanent loss.
- Governance: UNI token holders are empowered to govern the Uniswap platform, with voting power distributed in proportion to your UNI balances.
How can you use UNI?
The function of UNI is mainly to reward people who provide liquidity to the trading pairs. In addition, UNI can also play a governance role. There are many governance rights including shaping the Uniswap protocol, UNI community funding, Protocol conversion fees, Ether ENS, tokens.uniswap.eth, SOCKS liquidity tokens, and so on.
You can invest in Uniswap by purchasing/swapping for UNI. The easiest way to get UNI is through a centralized cryptocurrency exchange such as Bitcoin.com or wallets such as the Bitcoin.com Wallet.
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