What is Uniswap?
Uniswap is not your typical cryptocurrencyCryptocurrency A digital currency based on cryptographic technology to verify and secure its transactions and control the supply. A blockchain is used to store transactions transparently and verifiably. exchange. Instead, it’s a decentralized liquidityLiquidity The ease with which an asset can be bought or sold without affecting its price. protocol. Think of it as a network of smart contracts connecting people who provide liquidity with those who want to trade the tokens.
- Liquidity Providers: Individuals or institutions depositing tokens into Uniswap.
- Traders: Those trading tokens with Uniswap’s liquidity pools.
Unlike traditional exchanges with centralized order books, Uniswap operates through automated smart contracts and will quote price using an algorithm.
Uniswap Liquidity Pools and Providers
Every exchange needs liquidity for better price discovery and stability. It is the core of trading and the most vital feature for every exchange, decentralized or not.
Of course, this is easier to find for big pairs and tokens, but for shitcoins it is a tough challenge, and they want to be good competitors to centralized exchanges, so how do they attract the most wanted thing in crypto ?
Uniswap’s solution was to crowdsource liquidity on the Ethereum blockchainBlockchain A public and immutable ledger of cryptographic transactions, organized in blocks. through smart contracts and offer fees in return for liquidity.
- Liquidity providers deposit two tokens in equal amounts, creating a liquidity pool.
- In return, they receive a liquidity pool tokenToken A digital asset issued on a blockchain, representing various utilities, rights, or value., representing ownership and entitled to profits.
This model allows anyone to provide liquidity, making them part owners of the protocol, and to earn money from their idle tokens.
$10 billion worth of cryptocurrency tokens have been locked in Uniswap when v3 released.
The Constant Product Formula
Uniswap prices assets using the constant product formula (x * y = k), where:
- x and y are the liquidity pool’s assets.
- k is the constant amount of pool liquidity.
This formula ensures that when trading tokens, the total liquidity in the pool remains constant. Larger buys impact liquidity, influencing token prices.
To maintain price equilibrium across exchanges, Uniswap relies on arbitrageArbitrage Exploiting the price difference between two markets to make a profit. traders. They exploit price differences between exchanges, ensuring Uniswap’s prices align with the broader marketMarket A place where assets are bought and sold..
In short, these traders will spotSpot A market where assets are bought and sold for immediate delivery. the price discrepancies between lets say, Uniswap and Binance for example, and will profit on these.
The opportunity of profit ensures that the price aligns with every other market.
What made it number one ?
Let’s break it down one more time.
- Liquidity providers deposit tokens.
- Arbitrage traders keep prices in check.
- Retail traders swap with liquidity pools.
- All traders pay fees to liquidity providers.
Uniswap’s genius lies in its simplicity, operating automatically with smart contracts, eliminating intermediaries, and maintaining 24/7 uptime with efficiency.
Also, obviously no KYCKYC A procedure requiring users to verify their identity to comply with regulatory standards. and not having to trust any exchange is a big plus, a lot of people were traumatized by MtGox & QuadrigaCX-type events.
What made it a genius product and not just a good project is the UI.
The UI is very simple and set an industry standard for other dexes.
Everything is crystal clear for the user and goes straight to the point
Uniswap V3 & Optimism
Uniswap V3 offers improvements over V2:
- Liquidity providers can set sell price ranges.
- Potentially less slippageSlippage The difference between the expected price of a trade and the actual price at which it is executed, often occurring during periods of high volatility or low liquidity. in trades.
- Different fee-tiers for LPs based on risk.
- Way more capital efficiency
- Cheaper gas costs compared to V2.
Uniswap V3 on Optimism Network enhances scalabilityScalability The ability of a blockchain network to handle a growing number of transactions efficiently., reducing transaction fees (meaning the fees on the chain, not the swap ones) and processing times significantly.
Is there a token ?
Of course, the infamous question. Yes, there is.
UNI is Uniswap’s governance token, giving holders a say in protocol decisions.
While it may not directly share transaction fee profits like some tokens, UNI holders play a crucial role in shaping Uniswap’s future, but it might not be of your utmost interest.
