Uniswap: Decentralized Finance

Uniswap is a totally different kind of exchange that employs an automatic liquidity protocol, a very new type of trading methodology. It is fully decentralized, meaning it isn't owned and run by a single company. As the second-largest cryptocurrency project in the world by market capitalization, Ethereum is the foundation upon which the Uniswap platform was constructed in 2018. It allows it to be interoperable with any ERC-20 tokens and infrastructure, including wallet services like MetaMask and MyEtherWallet.

Additionally, Uniswap's code is freely available for anybody to copy and use to build their decentralized exchanges. Users may even offer tokens for free on the market, thanks to it. This distinction alone sets them apart from typical centralized exchanges, which are profit-driven and demand exorbitant fees to list new currencies. As Uniswap is a decentralized exchange (DEX), users always keep control over their money, unlike centralized exchanges that demand traders give up control over their private keys in order to log orders on an internal database instead of executing them on a blockchain, which is more costly and time-consuming.

It removes the possibility of losing assets in the event that the exchange is ever compromised by keeping possession of the private keys. Based on the most recent data, Uniswap is the fourth-biggest decentralized finance (DeFi) platform, with over $3 billion in cryptocurrency assets stored on its network.

HOW DOES UNISWAP WORK?

Two smart contracts—the "Exchange" contract and the "Factory" contract—power Uniswap. These are automated computer programs that are made to carry out particular tasks in response to predetermined circumstances. Here, new tokens are added to the network by the factory smart contract, and all token swaps, or "trades," are facilitated by the exchange contract. The Uniswap v.2 platform has been modified to allow for the swapping of any ERC20-based token for another.

AUTOMATED LIQUIDITY PROTOCOL

Uniswap uses an automated liquidity protocol to address the liquidity issue with centralized exchanges. It operates by providing incentives for exchange traders to become liquidity providers or LPs: Users of Uniswap combine their funds to form a fund, which is then utilized to carry out every trade made on the platform. Every listed token has a pool into which users may contribute, and a computer-run math process determines each token's price.

This technique eliminates the need for a buyer or seller to hold out on completing a deal until the other party shows up. Instead, as long as there is sufficient liquidity in that specific pool, they may execute any deal quickly at a known price.

In proportion to the amount they have invested in that pool, liquidity providers earn a percentage of the reserve's total fees when they elect to withdraw. They subsequently destroy the token they were given, which records the amount of stake they owe.

UNI: THE NATIVE UNISWAP TOKEN

A governance token is UNI, the native token of Uniswaps. It allows token holders to cast votes on proposed updates and platform modifications, such as how newly created tokens should be allocated to developers and the community and how fee schedules should be adjusted. Initially developed in September 2020, the UNI token was intended to keep consumers from switching to competitor DEX SushiSwap. SushiSwap, a fork of Uniswap, rewarded Uniswap customers with SUSHI tokens one month prior to the debut of UNI tokens, encouraging them to transfer their money to the new platform.

It was a novel kind of token that awarded users a share of all transaction costs paid to the platform in addition to governance rights over the new protocol. In response, Uniswap decided to create one billion UNI tokens and give 150 million of them to all platform users. 400 UNI tokens, or more than $1,000 at the time, were given to each individual.