Uniswap protocol is among the most talked-about projects. You might be wondering what is Uniswap protocol. At its core, Uniswap enables you to trade and swap cryptocurrencies over EVM-compatible blockchain networks in a decentralized way without any intermediaries. This crypto project quickly gained traction and climbed up the charts within the last few years thanks to its straightforward user interface and transparency. As of 2023, the UNI token leads the defi market with approximately $3.9 Billions worth of total value locked and processes over $10 billion in weekly trading volume.
Key Takeaways
- Uniswap is DEX that lets you swap ERC-20 tokens using your favourite custodial and non-custodial wallet.
- You can earn crypto-tokens by participating in liquidity mining pools.
Definition: What Is Uniswap?
Uniswap is a decentralized exchange (also referred to as Dex) deployed on the EVM-compatible blockchain. It essentially enables you to buy and sell cryptocurrencies. It allows you to swap ERC-20 tokens over EVM-compatible blockchains pseudonymously. Simultaneously, it allows you to deposit funds in liquidity pools enabling you to earn interest in the form of crypto-tokens for your participation. Using Uniswap’s platform, you can trade crypto-currencies literally from anywhere in the world, with anyone over the internet, without an institution or corporation, or government.
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Attributes of Uniswap
Security and Safety:
The decentralized exchange platform provides top-notch security features to every single user. Additionally, your crypto-currencies are never pushed to any kind of third-party, external entity, or institution. Because no third party is involved in the transaction, your funds are not subjected to counterparty risk. You are not asked to trust your asset with any type of custodian service provider; every trade takes place on the decentralized platform. Uniswap enables you and your trading partner to transact directly from your own crypto wallet to another.
Borderless and permissionless:
You can trade with anyone over the internet, irrespective of their geographical location. There is no border restriction. You need an internet connection, a smartphone, and a crypto-wallet to become a part of the thriving defi ecosystem.
Pseudonymous and convenient:
You don’t have to log in with different sets of accounts in order to access the Uniswap platform. You don’t have to sign up for an account using your personal information either. Not sharing your personal detail help keep you pseudonymous over the network.
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How does Uniswap protocol work?
Uniswap protocol mirrors the traditional crypto-exchange but in a decentralized fashion. It facilitates the purchase and selling of crypto-tokens using autonomous smart contracts. Smart contracts allow you to deposit funds as well as conveniently swap them with other tokens.
Let’s understand Uniswap’s smart contract infrastructure: An “Exchange” contract and a “Factory” contract are two main pillars of the Uniswap Dapp Platform. These autonomous smart contracts are general computer programs that are specifically built to execute certain sets of steps and function only when you meet certain pre-defined conditions. Both contracts are built to serve two different objectives. The Factory contract is essentially used to enable developers to add new tokens to the Uniswap platform. On the other hand, the decentralized exchange contract facilitates all operations related to cryptocurrency swaps (also referred to as trades). You can swap any form of ERC20-based tokens with another on the base Uniswap platform.
Uniswap V3 Dapp is deployed on top of EVM-compatible chains such as Ethereum, Polygon, Optimism, and Celo. What is EVM? EVM stands for Ethereum Virtual Machine. It is a program that compiles and executes the source code of smart contracts written by Dapp developers. It provides a run-time environment for a wider array of smart contracts that autonomously run on top of EVM-compatible chains. A particular section of the code gets executed only when every single node of the underlying blockchain protocol reaches a consensus.
What is UNI?
UNI is Uniswap’s native cryptocurrency. It is a governance token. It enables you to vote for key protocol transformation as well as make a significant impact on the overall ecosystem. Other than that, UNI helps maintain frictionless operations of the underlying Uniswap protocols. By owning a portion of the UNI token, you help UNISWAP become a self-sustainable, autonomous, completely decentralized protocol. But, to submit an improvement proposal to Uniswap, you are required to hold at least 1% of the cumulative UNI in supply. Liquidity pool contributors get rewarded with additional UNI tokens by the Uniswap platform.
Benefits of Uniswap
Compatible with most crypto-wallet:
With the Uniswap platform, you can connect any of your favorite crypto-wallet such as Liminal multi-sig wallet, Liminal-Trezor hardware wallet, MetaMask, and others. The Dex is compatible and functions seamlessly with all types of crypto-wallets.
Liquidity supply:
Liquidity is crucial for every decentralized crypto exchange. Usually, to successfully execute trades, a significant reserve of crypto funds is required to fulfill trade requirements. Decentralized exchanges that run low on reserves are not very useful or trade-worthy for a wider range of traders. In fact, liquidity providers don’t participate in liquidity pools with relatively low reserves. This is not the case with Uniswap. Uniswap is massive from a trade volume standpoint. It ranks at the top in terms of total value locked with the Dapp. According to DefiLama, Uniswap Version1’s TVL is approx. $8M, Version2’s TVL is approx. $1.08B, Version 3’s TVL is approx. $2.72B. If you are a trader, Uniswap can provide you with ample liquidity to trade funds. And, if you are a liquidity provider, then supplying liquidity to Uniswap shouldn’t be a hassle for you.
Participate and earn in liquidity mining:
The underlying Uniswap protocol is an automated liquidity protocol that incentivizes participants actively trading over the exchange to resolve trades and become liquidity providers. In other words, each and every liquidity provider pool their crypto-currency holdings together in order to provide a collective fund that can be utilized to support trades that takes place on the Uniswap platform. There are dedicated liquidity pools for each of the tokens listed over the Uniswap Dex. Individuals and institutions that deposit their holdings into pools are termed liquidity providers, and the entire operation is referred to as liquidity mining. The underlying algorithm works out the incentivization structure and exchange price for every liquidity provider. The incentives are equally distributed among all the liquidity providers.
Convenient User interface:
A number of defi protocols, such as Dexes, have improper and clunky user-interface. Bad user-interface results in a poor user experience and a significant drop in user engagement. This is not the case with Uniswap. Uniswap’s smart user-interface design choices significantly contributed to its massive success. Because the UI is straightforward, you don’t have to navigate a lot to understand the application and get your job done. You’re just required to connect your favorite crypto-wallet, that’s all; now, you can swap your crypto-token holding for another set of crypto-token or opt for a liquidity pool.
Conclusion
Uniswap is a trustworthy and transparent crypto-project. It is open-sourced, meaning anyone with questions and doubts can visit the source code to better understand how it functions. It is built to support a specific crypto-trading activity, which is critical for a broader range of crypto-users. With Uniswap, you can swap crypto-tokens in no time.
by Liminal
by Liminal