Uniswap is a cutting-edge decentralized exchange protocol that attempts to address the liquidity issue faced by decentralized exchanges by enabling token swapping on the exchange platform without the need for buyers and sellers to generate liquidity. Uniswap exchange rewards users who participate by giving them a fraction of the transaction fees and freshly created UNI tokens as incentives to maintain the liquidity of the exchange.
UNI
The Uniswap token is called UNI. Because it is a governance token, owners may vote on network enhancements and policies, and their votes will be weighted according to how many units they have invested.
Background
The creator of UniSwap, Hayden Adams, is a young yet accomplished designer/developer. With a grant of $100,000 from the Ethereum Foundation, Hayden and a small team of fewer than 10 people created the DEX. It completed a $1 million seed round led by the paradigm in April 2019 and released UniSwap V2 in May 2020. Since then, it has funded an $11 million Series A investment, introduced its native coin UNI, and cemented its position as the leading DEX on Ethereum.
How Uniswap works
Two smart contracts—an “Exchange” contract and a “Factory” contract—run Uniswap. These are automated computer programs designed to carry out certain tasks when certain criteria are satisfied. In this case, the exchange contract handles all token exchanges, or “trades,” while the factory smart contract is used to add new tokens to the platform. On the new Uniswap v.2 platforms, any ERC20-based token may be exchanged for another.
Versions of UniSwap
As its user base grows, it has released progressively upgraded versions:
UniSwap V1
On November 2, 2018, the Ethereum main net saw the release of UniSwap version 1. Only the switching of ETH-ERC 20 pairs was supported by UniSwap V1. Users who wanted to exchange USDC for DAI had to first exchange USDC for ETH before exchanging ETH for DAI. Also made possible by UniSwap V1 was the idea of LP tokens. A liquidity provider receives tokens representing the additional liquidity when they supply liquidity to a pool. Then, to get rewards, these LP tokens may be staked or burnt. To compensate LPs, trading costs are incurred.
Unswap V2
The UniSwap V1’s Proof-of-Concept was a huge success and encouraged the network to release the upgraded UniSwap V2 in May 2020. The main flaw of V1 was the “ETH bridging” issue, which was caused by the lack of ERC20-ERC20 token pools and led to significant leakage and increased fees whenever a user tried to trade one ERC20 token. The user interface and overall experience were improved in Uniswap V2. Additionally, it solved the ETH bridging issue by introducing the idea of ERC20-ERC20 pools. Other notable changes between UniSwap V1 and V2 include the use of wrapped ETH rather than native ETH in the core contracts, flash swaps, and a native pricing oracle. However, traders may utilize ETH by employing assistance contracts.
Characteristics of Uniswap V2
They include:
Flash swap for UniSwap V2
Users may withdraw any quantity of ERC20 tokens using the flash swap idea without making a deposit. However, after the transaction execution, they might either pay for the withdrawn tokens, pay for a fraction and return the remaining tokens, or refund all of the withdrawn tokens. Additionally, it included a protocol charge, which is fundamentally controlled by community governance. The protocol charge, which accounts for 0.05% of the 0.3% trading cost, is set aside for UniSwap platform development, which helps to determine the network’s future course.
Liquidity pool
Trading parties may directly exchange one ERC-20 token for another ERC-20 token using Uniswap V2. There is no direct trading between traders. Instead, they deal with a token pool that includes reserved copies of both tokens. The “Liquidity Pool” is the name of this token pool. Users that go by the name of “Liquidity Providers” contribute tokens to the liquidity pool. A pair of ERC-20 tokens may trade in each liquidity pool. Due to a large number of pairings, Uniswap will direct liquidity providers and traders to the appropriate liquidity pool for their transactions.
Providers of liquidity
Due to its liquidity providers, or LPs, it can enable crypto trading. LPs make cryptocurrency by providing liquidity since they share in the transaction fees charged by the exchange. To maintain the Constant Product automatic market maker, you must supply an equal quantity of DAI and USDC if you want to contribute capital to the DAI/USDC market. LPs may contribute capital to any liquidity pool by presenting collateral for both sides of the market. Users get liquidity tokens that keep track of how much of any specific liquidity pool they are in charge of when liquidity is delivered. Providers of liquidity may always exchange their tokens for the underlying collateral. To reward all liquidity providers, it assesses a 0.3% fee on each transaction. Since this cost is put back into the market at the time of transfer, deeper spreads are seen everywhere. Liquidity providers are given control over a bigger pool of money thanks to pro-rata stakes. Simply defined, a market maker’s revenue increases with the number of transactions on the market and the number of fees received.
