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What is Uniswap & How Does it Work? - UNI for Beginners

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Author: Hassan Maishera Updated: January 25, 2022

Centralised cryptocurrency exchanges have dominated the market since Bitcoin was first developed twelve years ago. To date, centralised exchanges still take the lion's share of the market trading volume and revenue. 

However, cryptocurrency traders and investors have other options, one of them being decentralised crypto exchanges (DEXs). They allow traders and investors to access cryptocurrencies on platforms that are not owned by any central entity.

Uniswap is one of the leading decentralised exchanges, and its token, UNI, is used to power the platform. UNI has grown to become one of the top 25 cryptocurrencies by market cap.

Why Was Uniswap Invented?

Uniswap is one of the first decentralised cryptocurrency exchanges that was developed. At the time, centralised exchanges were the dominant platforms, and they determined the coins to list and other criteria. Uniswap, alongside other decentralised exchanges, were developed to give investors and traders another option.

As a decentralised cryptocurrency exchange, there is no central entity controlling Uniswap. The tokens and coins available on the exchange are contributed by other traders. The traders who provide liquidity on the network earn commissions via processes such as staking.

With Uniswap and other decentralised exchanges, developers have the option of developing and launching their tokens on the platforms with ease. This also makes it easy for the users to gain access to a wider range of tokens that are otherwise unlisted on the centralised exchanges.

The UNI token is needed to conduct transactions on the Uniswap exchange. The Uniswap DEX solves some of the centralised exchange problems like liquidity (with automated solutions) and more. The UNI token also allows holders to shape the future of the exchange through fair governance. All these features make decentralised exchanges like Uniswap more attractive to some investors.

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How Does Uniswap Work and What Technology is Behind It?

Uniswap, like most decentralised platforms, runs on smart contracts. In the case of Uniswap, it uses two smart contracts. The first one is the factor smart contract that the platform uses to add new tokens. The second smart contract is the exchange contract that allows tokens to be swapped, ensuring smooth trade execution. Uniswap runs on the Ethereum blockchain and supports a wide range of ERC-20 tokens.

Uniswap uses an automated market maker (AMM) model to handle liquidity on the platform. This method involves paying incentives to users on the exchange when they become liquidity providers or LPs. The liquidity providers provide the needed funds to ensure all trades on the platform are executed. Every token listed on the Uniswap platform has a pool that traders can contribute. The prices of the tokens are determined based on a mathematical algorithm run by a computer.

Thanks to the AMM system, the buyers and sellers don't wait to wait for each other to complete transactions. Rather, they can execute their trades almost instantly at the set prices as long as there is enough liquidity in a token's pool to facilitate such a trade.

The liquidity providers (LPs) are rewarded for putting their funds in the pool to ensure smooth trading processes. LPs are given tokens that represent the amount they stake in the pool. For instance, if an LP stakes $30,000 in a pool that contains $200,000, he receives a token for 15% of the pool. The LPs can redeem their tokens for a share of the trading fees on the network.

Is Uniswap Real Money?

It is tough to consider UNI real money since it wasn't created to serve as a currency in the real world. The UNI token was created to help users on the Uniswap pay for trades and certain activities on the network. UNI is also a governance token, giving the holders the right to vote on developments and changes to the Uniswap platform.

Within the cryptocurrency space, there are certain cryptos that were created to serve as currencies, but UNI is not such a coin. Some cryptocurrencies like DASH and Litecoin aim to be currencies that can be used to pay for goods and services globally. The emergence of stablecoins like USDT, USDC, and others have also made them more qualified to be used as real-world currencies.

Fees & Expenses of Uniswap

The UNI token is used to execute some trades on the Uniswap decentralised exchange. While several cryptocurrency exchanges implement the taker and maker fee system, Uniswap operates differently. The Uniswap exchange has a set fee of 0.30% per trade. This flat fee is slightly higher than the industry average of $0.25%. However, the trading fee on Uniswap is decent.

When buying the UNI token from other cryptocurrency exchanges, the transaction fee might differ. As stated above, the transaction fee depends on the system implemented by the exchange you are using. Hence, we encourage you to do more research on the fee system of an exchange before you start using them. Fees from brokers and exchanges can be as low as 0.5% or as high as 3%.

What Are the Benefits of Uniswap?

The Uniswap cryptocurrency exchange and its native UNI token offer crypto traders and investors a wide range of benefits. These include:

Automated liquidity and earning potential

The decentralised trading method deployed by Uniswap has various benefits. For starters, the automated liquidity protocol used by Uniswap solves some of the liquidity issues faced by centralised exchanges. It also allows the users to make money by becoming liquidity providers. The LPs earn money for staking their funds while the exchange has enough liquidity to execute trades.

Faster trading setup

As a decentralised exchange, Uniswap allows traders to enjoy a faster trading setup. This is because there is no registration required like the centralised exchanges. Becoming a liquidity provider or a trader on Uniswap is fast—almost instant—and easy.

Faster listing of coins

Developers also get to benefit from Uniswap because their new ERC-20 tokens are listed faster and made available to traders. Unlike the centralised exchanges that have to vet the tokens and take time listing them, Uniswap lists tokens faster and makes them available to users right away. This makes Uniswap very convenient for both developers and users.

Can Uniswap Be Used Anonymously?

The UNI token is not a privacy-focused token. Hence, it doesn't give much attention to privacy or anonymity. The UNI token powers the Uniswap decentralised cryptocurrency exchange, and some hold it as an investment asset.

With the cryptocurrency market experiencing rapid growth over the past few years, transactions are hardly anonymous these days. Financial regulators globally are starting to implement policies that require crypto exchanges to register with them before offering services. Furthermore, exchanges are now required to implement KYC (Know Your Customer) and AML (Anti Money Laundering) policies to curb the negative use of cryptocurrencies.

How Safe is Uniswap?

Uniswap is a safe token. The UNI token is built on the Ethereum blockchain, which is one of the most secure networks in the crypto space. However, the safety of your UNI tokens is ultimately in your hands.

We recommend that investors should store their UNI tokens on cold storage (hardware) wallets such as Ledger or Trezor models after purchasing them. This is because cryptocurrency exchange wallets and other hot wallets don't provide the level of security available with cold storage wallets. Ensure you implement extra security features such as 2FA and more.

What Teams Are Working On Uniswap Development?

Uniswap was developed by Hayden Adams, a former mechanical engineer at Siemens, in 2018. However, it has been a community-run decentralised cryptocurrency exchange ever since. The development team currently behind Uniswap is Uniswap Labs.

The software development studio has been in charge of most of the developments on the Uniswap platform. It is an open-source platform, which means that the code is stored on GitHub, and open-source developers can make meaningful contributions to the project.

Which Financial Institutions Are Invested in Uniswap?

Leading financial institutions are starting to show interest in cryptos. However, the interest is still in the early stages, and most decentralised finance (DeFi) projects are being overlooked. Despite that, Uniswap has attracted the interest of some top hedge funds and financial institutions over the past few years. Some of the leading investors in Uniswap include Andreessen Horowitz, Version One Ventures, Rockaway Blockchain Fund and several others. As the cryptocurrency market continues to evolve, more investments will come in, and the decentralised finance space could see leading financial institutions gain more interest.

Uniswap Mining

There is no mining when it comes to Uniswap. Mining is a way of releasing new coins to the market by solving complex mathematical problems. The miners also approve transactions on the network. However, mining is for blockchains that use the proof of work protocol. UNI is an ERC-20 token, which means it doesn't have its own blockchain. As such, there is no mining of UNI tokens. UNI tokens can, however, be earned by “liquidity mining”: Uniswap incentivises users to provide liquidity for certain trading pairs by issuing UNI tokens to LPs for those pools. 

Uniswap Wallet

Uniswap is one of the top 20 cryptocurrencies in the world by market cap. Due to its value and position in the market, a wide range of wallets allows traders and investors to store the token. As an investor, we recommend transferring your UNI tokens to these external wallets for safekeeping. Some of the best wallets for storing UNI tokens include:

  • Ledger Nano X (cold storage wallet)

  • Trezor (cold storage wallet)

  • MetaMask (hot wallet)

  • MyEtherWallet

  • Atomic Wallet (hot wallet for phone and desktop)

We recommend implementing the necessary security protocols on the wallets like 2FA to ensure the safety of your UNI tokens at all times.

Is Uniswap Worth The Investment?

The decision on whether Uniswap is a worthy investment or not depends on the investor. As an investor, you have to analyse the project (Uniswap) to determine if it is for you or not. Uniswap has been around for a few years but has experienced massive growth to become one of the leading tokens. The Uniswap decentralised exchange rivals some centralised exchanges in terms of daily trading volumes, an indication of how far the Uniswap cryptocurrency project has come over the past two years.

Regardless of your decision, always ensure you approach the cryptocurrency market with caution. It is a volatile market that could provide traders with massive gains but also could lead to huge losses. We recommend only investing an amount you can afford to lose.

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Frequently Asked Questions

  1. Unlike the centralised exchanges where the fees go to the owners, DEXs such as Uniswap don’t make money. Transaction fees are shared amongst the liquidity providers to ensure that everything runs smoothly. Fees are applied when swaps are made on the DEX
  2. Uniswap is one of the top 25 cryptocurrencies by market cap. This means that it is popular and available on a wide range of trading platforms. You can buy the UNI tokens on crypto exchanges (both centralised and decentralised), brokerage platforms, and P2P exchanges. However, we usually recommend readers use regulated exchanges or brokers to buy UNI or any other cryptocurrency.
  3. Yes, you can use the Uniswap token on your mobile phone. You can access the token via crypto exchanges and wallets. These platforms have mobile versions that allow users to access their coins and tokens easily.
  4. The answer to this depends on the part of the world where you live. Cryptocurrencies are governed by different rules in various parts of the world. Do your own research to find out about the cryptocurrency regulations in your country to know if Uniswap is legal or not before investing.
  5. Uniswap's trading volume is still small compared to the leading centralised exchanges like Binance, Coinbase, and Huobi. However, Uniswap has been recording massive growth in recent years, and it could challenge these centralised platforms in the future.
  6. SushiSwap is a fork of Uniswap and is one of its major competitors in the decentralised exchange space. However, there are other leading competitors like PancakeSwap on the Binance Smart Chain as well.
  7. Some of the leading UNI pairs on cryptocurrency exchanges include UNI/USD, BTC/UNI, ETH/UNI and more. Depending on the cryptocurrency exchange you are using to trade UNI, the trading pair could also be UNI/USDT. The USDT pair is for the exchanges that use the Tether stablecoin in place of the US Dollar fiat currency.
  8. The V2 and V3 are various upgrades of the Uniswap network. V2 introduced the optional 0.05% protocol fee on the Uniswap platform. In contrast, V3 introduced a wide range of features such as flexible fees, active liquidity, range orders, Non-Fungible Liquidity, advanced oracles and several others. Uniswap V3 was launched in May 2021.
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