What is Uniswap? Everything you need to know!

If you are familiar with the world of cryptocurrency but haven’t heard about Uniswap, there is every reason to believe that you are still living in a cave. This is because it is one of the most popular “names” in the cryptocurrency industry at the moment. It has recently been discovered that most people don’t understand what this platform is basically all about. Without such knowledge, it may be very difficult for you to make the right decisions when it comes to crypto investment.

There is no need to bother though as you have definitely come to the right place. The major aim of this post will be to reveal everything about Uniswap. You will not only find out about Uniswap. Also, the details below will explain how it works in a comprehensive manner.

A complete overview of Uniswap

This is a set or group of computer programs which have been created to function on Ethereum blockchain. The primary goal is to ensure that a platform or means is created which will enable token swap decentralization. It is no secret that over the years, the cryptocurrency market has been operating based on centralized exchanges. Although these have their advantages like high trade volumes, improved liquidity on a continuous basis and fast turnaround for settlement, they also come with some shortcomings. For instance, trading activities need to be facilitated by custodians or middlemen.

The blockchain technology has been known to have some limitations. This has made it quite difficult and complicated when it comes to decentralized exchanges (DEXes) which can successfully compete with the already existing centralized exchanges. Apart from performances improving via the introduction of decentralized exchanges, there is a very high chance that user experience will also be optimized.

In order to come up with an exchange that is decentralized, developers started thinking. This was how the Uniswap idea came into existence. Its functionalities may be quite different from any traditional decentralized exchange. However, it has been discovered to come with some benefits that make the normal centralized exchange look outdated and stale.

What is a decentralized exchange(DEX)?

Just as explained above, Uniswap is an exchange protocol (decentralized) which has been created to exist on Ethereum. In a nutshell, this is a liquidity protocol that is completely automated. For trades to take place between different parties, there won’t be any need for middlemen or order books as you have in a centralized exchange system. It has been brought into existence to enable users to carry out trade activities without the assistance of intermediaries. One of the major benefits that Uniswap has been known for is that its degree or level of centralization is very high.

It is an open-source application. In other words, it comes with source code that can be easily modified or edited by anyone. Users have the permission or access to improve the software beyond its present state whenever such is deemed necessary. Another way to look at its open source technology is that people can easily create decentralized exchanges of their own. In this case, there won’t be any need to write programming codes from scratch. Just a little tweaking of the already existing codes, you will easily create an exchange platform that is decentralized. 

Some of the centralized exchanges that stand as middlemen in trades are Binance and Coinbase. Platforms like these are being governed by one authority – the company through which such exchanges are being managed. When funds are stored on their platforms by users, such can be used to carry out trading via the normal system of order booking.

Order trading that is book-based is when sell as well as buy orders are listed. In this case, the total amount which has been placed for every order will be shown. For this trade system to be successful, both the sell and buy order will have to match.

How does e decentralized crypto exchange work?

Assuming you plan using a centralized exchange like any one mentioned above to sell 1 BTC at a price of $60,000. This means a buyer that is willing to buy at such a price must show up. There has been one major challenge that this system can suffer from. This is known as “liquidity”. It simply means the order book may contain too many or few orders at once. For instance, low liquidity can mean traders can have problems filling their sell or buy orders.

Simply put, a centralized exchange system can lead to too many buyers and sellers at a time. On the other hand, it can also bring about few sellers and buyers. With the advent of Uniswap in the year 2018, trading activities are automated. In fact, it exists on a system called “automated liquidity protocol”. For instance, there won’t be any need for exchangers like Binance and Coinbase. This gives buyers and sellers more control over their trade activities.

Based on market capitalization, Ethereum is the second largest cryptocurrency in the world after Bitcoin. Of course, it is good news that it has been able to support such innovation. It is also worthy of note to point out that tokens can be listed on the exchange by users. The best part is that this is completely free of charge.

Normal exchanges like Binance and Coinbase exist to make profits. For coins to be listed using their centralized platforms, they usually charged users very high fees. This is one of the major reasons why most crypto currency traders are beginning to embrace the idea of Uniswap. Imagine how much you are being charged by all these exchanges in order to have coins listed. You will be saving lots of money given what this decentralized exchange platform has got to offer.

Talking about control, Uniswap is aiming to enable users to experience it completely. In a centralized exchange system, your private key will be compromised if your account gets hacked. The major problem is that you don’t have any control of your private key under CEXs (centralized exchanges).

How Does Uniswap Work?

Having seen the above about Uniswap including some of the benefits that it tends to offer users, there is no doubt that you are very eager to know its mode of operation. In other words, you definitely want to find out more about how it works. This section will be explaining all of such in a very clear and comprehensive manner.

The first thing to note is there are 2 contracts which Uniswap has been created to run on. These are factory contracts and exchange contracts. They are computer programs designed to carry out some roles or functions based on certain conditions. In other words, these roles can only be carried out when some conditions have been met. It is also worthy of note to point out that such a process is automated. Factory smart contract is responsible for the addition of new tokens. For token swaps to be facilitated after such addition to the platform, an exchange contract will have to perform its role.

Simply put, while it can be said that factory contracts see to it that new tokens are added, exchange contracts are responsible for having trade of such tokens facilitated. One thing is quite obvious in all of these. It is the fact that both contracts have their specific roles to play in order for the Uniswap platform to function optimally. At the moment, ERC-20 tokens can be swapped by users without any need for an order book.

ERC-20 tokens can be launched provided a liquidity pool is available for traders. This is what has made the platform free when it comes to listings. It is a system that ensures sellers or buyers don’t have to wait for any opposite party before trades can be completed. Rather, trades are instantly executed. The only requirement or condition is that there has to be sufficient liquidity for such trade to be facilitated.

When users of the system put their funds, a token will be given to them each indicating the percentage funds that have been contributed. If you contribute $5000, to a pool of around $50,000, the percentage of token that you will be given for such a pool is 10%. Redeeming this token can happen via share of trading fees. For every trade that is complete via the Uniswap platform, users will be charged a flat fee of 0.30%. This is going to be sent to the liquidity reserve automatically.

A liquidity provider may decide to leave for one reason or another. In this case, a portion or percentage of the fees generated from the reserve will be given to him. This is going to be based on whatever amount he has stated in the pool initially. After he has been given the amount, the initial 10% token he was given will be destroyed.

In the Uniswap V.2 upgrade, there was the introduction of another token. This can either be activated or deactivated via community vote and requires 0.05% from the charges of 0.30% generated from trades carried out on the platform. The purpose for this new token is to finance any kind of development or innovation in the near future.

Final words

Based on the above, it can be said that Uniswap is set to dictate how trade activities will be carried out in the world of cryptocurrency. This is quite interesting as investors will want to find out how to explore the system. If you want to learn more about cryptocurrencies, blockchain and exchanges you can check out our crypto guides. If you are more of a stock market person, we’ve got you covered with our stock market guides.

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