What is Uniswap?
The UNI token is the governance token for Uniswap, a protocol for exchanging ERC20 tokens in an automated liquidity provision manner on Ethereum. Uniswap v1 is an on-chain system of smart contracts on the Ethereum blockchain that implements an automated liquidity protocol based on a "constant product formula." This means that traders pay a 30-basis-point fee on trades, which goes to liquidity providers. Uniswap v2 is a new implementation that is based on the same formula, but with several additional features. UNI is now available on DeFi Swap, where users can swap UNI, become UNI Liquidity Providers, and earn fees by staking CRO.
Uniswap is the largest decentralized exchange protocol operating on the Ethereum blockchain. It was created by Hayden Adams, who had little coding or financial experience before starting the project. Adams was introduced to the idea of an automated market maker (AMM) in 2017 when his friend, an employee of the Ethereum Foundation, sent him a Reddit post written by Ethereum creator Vitalik Buterin in 2016. Adams spent the next year attending crypto conferences and working on Uniswap while unemployed. In July 2018, he received $50,000 in funding from the Ethereum Foundation, which allowed him to publish the first version of Uniswap on the Ethereum mainnet in November 2018. By July 2020, the exchange had completed over $1 billion in transactions, and by April 2021, it recorded more than $10 billion in weekly transaction volume for the first time.
To prevent users from defecting to rival DEX SushiSwap, Uniswap launched its governance token, UNI, in September 2020. A total of 1 billion UNI tokens were minted at launch, with 60% being distributed to community members and the rest going to team members, investors, and advisors.
Uniswap uses an automated market maker (AMM) to value assets using a pricing algorithm. The formula is "x*y = k," where x represents the amount of one token in the liquidity pool, y represents the amount of the other asset, and k is a fixed constant. In Uniswap, the value of both assets always remains at a 50:50 ratio. To participate, users only need an Ethereum wallet to start swapping tokens directly without the need for an order book. This is made possible by the use of an automated market maker (AMM) in which liquidity providers (LPs) deposit tokens into a smart contract. This liquidity then provides a price quote to traders without relying on any professional market makers. LPs receive a 0.3% trading fee.
Uniswap was the first platform to popularize the use of AMMs, and many other crypto protocols have since followed suit due to the decentralized and innovative nature of the model. However, one of the main risks of using an AMM is the potential for impermanent loss. Impermanent loss occurs when the price of one token changes relative to the other, resulting in opportunity cost for the LP who has contributed both crypto assets to the liquidity pool instead of holding them separately. The larger the price change, the greater the impermanent loss will be.
UNI is used for governance on Uniswap. Holders of UNI can participate in protocol governance and have a say in the usage of the treasury and future upgrades through votes on the Uniswap platform. UNI was distributed through an airdrop to users who had interacted with the protocol by swapping tokens or providing liquidity on 16th September 2020.
The investment information, comments, and recommendations provided here do not fall under the scope of investment consulting. Therefore, making an investment decision based solely on the information and comments provided here may not yield results that meet your expectations.
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