10 years ago, if someone told you to go to a place called Uniswap or Pancakeswap or Sushiswap in order to exchange money, you would have dismissed it as a scam. The culture of crypto has always had an uncanny mix of money and memes. In fact, Dogecoin (DOGE) was created as a joke. But look at what has happened now. DOGE is accepted by tech giants like Tesla and has a market capitalization of $13 billion. Uniswap, for example, is one of the widely used decentralized platforms to exchange crypto assets. In today’s article, we will understand what Uniswap is and how it works.
Before we step into the world of curve, we need to understand a concept called Automated Market Makers (AMMs). Uniswap (which is an AMM) allows digital assets to be traded without the need of a centralized exchange by using liquidity pools as opposed to traditional trading between buyers and sellers. At its core, users supply liquidity pools with tokens, and the prices of the tokens in the pool are determined by a simple mathematical formula. Anyone with few ERC-20 tokens can become a liquidity provider by supplying tokens to an AMM’s liquidity pool. Liquidity providers earn a fee for providing tokens to the pool. The fee is paid by traders who use a liquidity pool to swap tokens.
Uniswap works by using a smart contract deployed on the Ethereum (ETH) blockchain. The smart contract simply allows users to exchange ERC-20 tokens. Input the token that one wants to trade for and the contract will calculate the amount of tokens one will receive. To determine prices of tokens, Uniswap uses AMM’s to calculate based on supply and demand of the tokens.
The Uniswap protocol also has a built-in incentive for users to provide liquidity. Uniswap has a 0.3% fee (there are two tiers available too) for crypto swaps. To provide liquidity to a pool, a user must deposit an equal value of both tokens into the pool. For example, if a user wants to provide liquidity to the ETH/DAI pool, they must deposit 1 ETH and 1 DAI into the pool. The user will then earn a portion of the fees collected by the pool.
Uniswap was created by an Ethereum developer named Hayden Adams. Originally known as Unipeg, the DEX was inspired by Ethereum founder Vitalik’s idea. Shortly after the creation of Uniswap, it became a DAO (Decentralized Autonomous Organization). This means that it is governed by a group of people rather than a single entity. The UNI token was created in September of 2020 and is used to help decentralize the governance of the Uniswap protocol.
The first version of Uniswap was launched on the Ethereum mainnet in November of 2018. The protocol was created as a way to facilitate the trading of ERC20 tokens. Uniswap has since gone through two upgrades. Uniswap V2 introduced features like ERC-20 pairs, flash swaps, and price oracles.
The most recent version, Uniswap V3, was launched last year. This new version has better infrastructure, experience more precise execution of trades, and liquidity providers can have received better efficiencies with more control over the price ranges.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.