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What Is Uniswap? - A Comprehensive Guide To Uniswap DeFi Exchange

 

By Damian David, edited by Nerly Shammah Feb 21, 2023

 

 

What Is Uniswap?

 

Uniswap by definition is the leading Ethereum Blockchain integrated Decentralized Exchange supporting the swap and trades of all Ethereum-based tokens using an Automated Market Maker (AMM) protocol that is facilitated by liquidity pools and providers.

 

Decentralized exchanges as opposed to centralized exchanges are experiencing a considerable amount of growth in the cryptocurrency ecosystem and this is understandable due to a number of factors including that decentralized exchanges are positioned as an enhanced method of trading cryptocurrency. Liquidity pools, an Automated Market Maker protocol and Arbitrage Trading  are three of the most distinctive features of a Decentralized Exchange, and some of the biggest and most popular cryptocurrency exchanges are built with a Decentralized Exchange type of model – UNISWAP inclusive.

 

 

How Does Uniswap Work? 

 

Uniswap is powered by smart contracts on the Ethereum blockchain and they enable users to carry out trades instantly without the need for an intermediary like custodians to finalize trades. The design of Uniswap as a decentralized exchange(DEX) ensures that the platform does not serve as a custodian of users crypto assets, rather, a communication routes that recieves instructions via the smart contracts to facilitate trades once the pre-define terms are met, so users simply need to connect their privately manged wallets to interact with the protocol.

 

Just like Pancakeswap is being maintained for the trading of BSC standard tokens, Uniswap was built in 2018 by an Ethereum developer Hayden Adams. The idea was not just to facilitate trading of Ethereum standard tokens but also to introduce the Automated Market Maker (AMM) trading protocol which has since then been one of the most efficient and trustworthy modes of carrying out cryptocurrency trades. It is important to note that one of the recent updates to the Pancakeswap exchange has made it possible for it to now support the Ethereum Chain and also the Aptos Chain.

 

What is an Automated Market Maker (AMM)?

 

An Automated Market Maker is an enhancement to the traditional order book based matchmaking systems that is being used by most centralized exchanges like Binance. An Automated Market Maker allows you to swap cryptocurrency without the need of a custodian. This method ensures extra safety and privacy as the swap is carried out directly from a liquidity pool on the exchange itself. 

 

Most Ethereum based tokens have their trading pair with the Ethereum Coin, these Ethereum based tokens are provided by liquidity providers and thus makes up a liquidity pool. Using the Automated Market Maker (AMM) protocol, token prices in the liquidity pools are automatically determined in respect to their standard prices in other markets. Automated Market Makers are created using a formula provided as X × Y = K.

 

Remember it was stated that most tradable Ethereum tokens on the Uniswap Decentralized Exchange has its own pair with the Ethereum Coin. This pair is represented using the X and Y. Their total value or output is equivalent and this is represented by using the K which is the constant. This means that in every pair in a liquidity pool the total value of each token in the pair is constant regardless of the increase or decrease of quantity. 

 

That is, if you want to swap token X for token Y, and you deposit your desired quantity of token X in the liquidity pool, the total value of token X in the liquidity pool will adjust to remain constant with that of token Y thus decreasing the value of each X token. Likewise if you're to conclude the swap by receiving an equal value of token Y in respect to your X deposit, the total value of Y in the liquidity pool will adjust to remain constant with X thus increasing the value of each Y token.

 

What Is Uni Token?

 

UNI Token is the official "right to decision making" leverage in the Uniswap Decentralized Exchange. Due to the open source nature of the Uniswap architecture, a similar type of Exchange was created with one of their first goals being to provide a more profitable trading experience for Uniswap users thus robbing the Uniswap exchange of its relevance. 

 

This situation led to the development of 1 billion $UNI tokens in September 2020. After its development, 400 $UNI tokens worth over $1000 by then were distributed to each of all the contract addresses that had ever interacted with the Uniswap Exchange preceding the distribution. 

 

And since then it has been modified for other profitable purposes, the most important being its governance rights. There's currently a circulating supply of over 700 million $UNI tokens.

 

Some Unique Features Of The Uniswap DeFi Exchange

 

Open Source: The Uniswap Exchange achieves apex transparency by making its source codes to be open and public. This will inadvertently allow for future collaborations, modifications and enhancements which will subsequently make the Uniswap Exchange more productive and profitable for users.

 

Automated Market Maker (AMM) protocol: The Uniswap is a safe decentralized exchange due to a number of reasons. One being the fact that it uses an Automated Market Maker (AMM) to carry out trades and swaps. Assets that are swapped or traded isn't facilitated by a custodian or middleman who'll have to temporarily hold them just like it works in an order book based matchmaking system. So this makes it possible to carry out the swaps directly from your wallet to the exchange liquidity pools itself.

 

Free token listing: The Uniswap Exchange allows anyone to create and list a token on their exchange without any fee or charges incurred. This is probably a step forward to compensate for the exuberance of the Ethereum Blockchain in terms of gas fees etc. Also this feature definitely sets them aside from most Exchanges and thus gives them a leading edge in the DeFi market.

 

No KYC protocol: To use the Uniswap Exchange you wouldn't need to register or verify your identity. It is completely permissionless thus increasing its potency for security and anonymity which are arguably two of the most important factors In the cryptocurrency market.

 

Decentralized: The Uniswap Exchange is a Decentralized Exchange. There is no central authority because everyone has a say in the exchange as long as they wield the $UNI token. This will ensure a faster, safer and more diversified environment for the trading and swapping of tokens on the Ethereum Blockchain network.

 

How to use the Uniswap Exchange 

 

-First log onto app.uniswap.org - You'll be required to connect to a compatible wallet (preferably metamask).

 

-Give permission to your metamask wallet to allow the Uniswap Decentralized Exchange to access it.

 

-Now you can select an Ethereum based token of your choice to swap and confirm subsequent transactions.

 

What are liquidity pools and why are they important in Uniswap?

 

Liquidity pools are pairs of tradeable tokens that are provided by liquidity providers. Liquidity providers are users of the cryptocurrency market who give up their tokens or cryptocurrency to a liquidity pool in a Decentralized Exchange to facilitate trade, and in return get a percentage of the fee charged to carry out any trade in that particular liquidity pool. This process is what made it possible for the Automated Market Maker (AMM) protocol to function in the Uniswap Decentralized Exchange.

 

What Are Arbitrage Traders And Why Are They Important On Uniswap?

 

These are freelance users of the cryptocurrency market that take advantage of the slightest difference in the prices of cryptocurrencies across the market to make personal profit. They play an important role in the Uniswap Exchange because they work in unison with the Automated Market Maker (AMM) protocol to make token prices to be uniform across the exchange in respect to their market prices. It is worth bearing in mind that the Automated Market Maker (AMM) protocol can function with or without Arbitrage traders.

 

Why Choose The Uniswap DeFi Exchange?

 

Uniswap is based on the Ethereum Blockchain network, which is the second biggest Blockchain in the decentralized finance ecosystem with respect to market cap. This makes Uniswap very much needed as it serves as the best gateway to the Ethereum Blockchain when you consider factors like uniformity, more specific functions and utilities, faster transactions, convenient interfaces, amongst others. Other advantages include its use of an Automated Market Maker (AMM) to trade and swap crypto assets as a permissionless ecosystem. Considering the above mentioned factors, without doubt the Uniswap Decentralized Exchange should be top shelf in one's list of decentralized exchanges to make use of.