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Things are getting exciting in the DeFi world.
Decentralized exchanges like Uniawap are taking the crypto world by storm.
Unprecedented growth and usage.
Of course this brings to the table many pro’s and con’s.
In today’s post we want to introduce you to Uniswap, your DeFi coin hub.
Let’s dive into the world of the Uniswap protocol together!
- Alex S., DeFi Slate Team Member
Table of Contents:
Understanding Decentralized Exchange
How it works:Contracts
What makes Uniswap so special?
What to expect
Understanding Decentralized Exchanges (DEXs)
Whether you’re a crypto trading wiz or just a beginner, chances are you’ve heard of a little something called a decentralized exchange. Now all this really refers to is an online peer-to-peer service allowing the direct transaction of cryptocurrencies between two parties. These decentralized exchanges are important because they allow individuals to make transactions without involving a third-party.
So why is this so important you ask? The introduction of a third party creates risk by leaving user funds vulnerable to potential theft and other security breaches. Because of this, cutting out a middleman (AKA the risk), DEXs lead to more privacy and security for the users and their assets. After all, a chain and community is only as strong as its weakest link.
So what’s the deal with Uniswap? As you can probably guess, it’s a method of decentralized exchange.
Uniswap is a nonprofit project that facilitates the trade of ETH and ERC20 tokens. Uniswap is 100% open source and also has the perk of allowing users to contribute to liquidity pools and be rewarded interest for providing this liquidity (think exchange fees) that occur. As of July 7th, Uniswap has over $48 million liquidity with more than $15 million in volume over the last 24 hours (statistics and visuals provided by Uniswap). This goes to show just how ‘new kid on the block’ popular this protocol is.
It’s worth mentioning that as of now, there are 2 versions of Uniswap available. But please note that while V1 is still operational, it is no longer under active development. Because of this, assume we are referring to V2 in the meat and potatoes of our post.
How Uniswap Works: Smart Contracts
Uniswap works through smart contracts. Anyone on the platform can create an interface that then connects these smart contracts allowing the user to begin exchanging with others on Uniswap.
There are two types of contracts used in Uniswap with the first being an Exchange contract and the second being a Factory contract. Exchange contracts hold a pool of Ether and any specific Token that users then swap against. Factory contracts create new Exchange contracts and also register the address of a ERC20 token to its Exchange contract address. Read more in-depth here.
What makes it so special?
The main thing that separates Uniswap from other decentralized exchanges is the way in which pricing is determined. Instead of linking buyers and sellers to achieve the price of a token, Uniswap uses a pricing mechanism in the form of an equation also known as the Constant Product Market Maker Model.
The equation for the Constant Product Market Maker Model is simply x * y = k. X represents the quantity of ETH while y represents the quantity of ERC20 tokens that are accessible in a liquidity pool. K is the constant in this equation and represents
Now, this means that the price of tokens can either increase or decrease if a trade happens. Uniswap is basically balancing out the value of tokens and their swapping in accordance with the value of which users purchase and sell them.
Additionally, another key difference is that almost any ERC20 token can be listed. Each individual token has its own smart contract as well as liquidity pool unique to it. Even if these don’t already exist for a token, they can be made effortlessly. Once the criteria are met, anybody will be able to exchange the new token and will be able to contribute to its liquidity pool. They’ll also be able to earn a liquidity provider fee equal to 0.3% so long as they have an balanced value of ETH and the ERC20 tokens in question. Read more on decrypt.
The Future Of Uniswap
Uniswap has shown to be a lucrative platform for traders of cryptocurrency. It’s got more privacy and security by being a decentralized exchange. Users can create contracts with relative ease, and the pricing mechanism is easy to understand. On top of that, almost any ERC20 token can be listed which makes Uniswap a swiss army knife for trading.
We can without a doubt expect big things to come from Uniswap down the road. It's already showing that it can be integrated with other DeFi products like DeFiZap which allow users to buy tokens with simpler one-click methods. Similar integrations are expected to occur more down the road bringing new users and liquidity to the exchange.
⚠️DISCLAIMER: Investing into cryptocurrency and DeFi platforms comes with inherent risk including technical risk, human error, platform failure and more. We are strictly an educational content platform, nothing we offer is financial advice. Please refer to our blog for more on mitigating your downside when using these protocols!
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