Learn about the popular DeFi project Uniswap (UNI) in one article

Uniswap is a decentralized exchange protocol for ERC20 tokens based on the Ethereum blockchain. The service runs on a suite of smart contracts, making it fully decentralized, censorship-free and permissionless.

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The operating mode of Uniswap

Uniswap was created by Hayden Adams with a grant from the Ethereum Foundation to fund pre-launch development and audits. The first version of Uniswap was launched on the last day of Devcon 4 with an initial liquidity of 3 tokens worth only $30,000. It quickly gained traction and an initial seed investment, enabling the team to work on improving the protocol and launching a second version.

The main new function of Uniswap V2 is the ERC20/ERC20 liquidity pool. Instead of using a traditional order book model, Uniswap pools tokens into smart contracts and users trade against these liquidity pools. Anyone can swap tokens, add tokens to pools for fees, or list tokens on Uniswap.

Instead of using an order book for price discovery, where an asset's price is derived from the meeting point between the highest bid and lowest ask, Uniswap uses the exchange's smart contracts to pool tokens and determine the price.

For example, if you want to trade DAI with ETH, ETH will be sent to the contract pool, and DAI will be sent to you. No need to wait for the order book to match, as you trade directly with the smart contract. The amount of DAI you get is based on an automated market maker formula – based on the ratio of ETH to DAI in the pool.

One maintains a ratio relative to other market prices by making adjustments to the pool. Suppose the pool is out of balance. For example, the current market price of 1 ETH is 100 DAI, but 1 ETH in the pool can get 200 DAI. Market makers will not hesitate to put more ETH into the pool to draw out DAI, and then sell it on another exchange for a profit. After a while, this trading activity rebalances the pool. This is an extreme example, but it helps illustrate how liquidity pools retain market prices.

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Fork Sushi

As DeFi has taken more and more market share, the trading volume on Uniswap has also begun to rise. At some point, trading volume exceeded $500 million, surpassing some of the largest centralized exchanges such as Kraken and Coinbase. In August 2020, SushiSwap came into being. The project, a fork of Uniswap, was born out of direct competition.

In just a few days, SushiSwap had more than $1 billion in total value locked in the protocol, draining the liquidity of over 75% of the assets that its parent company, UniSwap, had already amassed. In just 6 days, the native token SUSHI rose from $2.26 on August 29 to $7.24 on September 3, an increase of 220%. But after the hype subsided, some of the liquidity returned to UniSwap, and the protocol quickly returned to the level it was before SushiSwap was created.

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Governance token UNI, let the community take power

On September 16, Uniswap announced the launch of the governance token UNI. Interestingly, anyone who used the service before September 1st will be eligible to claim 400 UNI as part of a massive airdrop. In addition, the protocol's liquidity providers are also retroactively rewarded with additional UNI tokens. The UNI token was distributed to around 50,000 Ethereum addresses, making it one of the most widely distributed tokens in the space.

On the day of the announcement, 400 UNI were worth approximately $1,200. In just a few days, UNI was being traded everywhere – both on DeFi’s decentralized and centralized exchanges. The value of the token quickly rose to $8, meaning the 400 UNI given away were worth about $3,200.

The introduction of UNI as a governance token enables shared community ownership and a vibrant, diverse and dedicated governance system designed to actively steer the protocol into the future. The Uniswap governance framework is limited to contributing to protocol development and usage and the growth of the broader Uniswap ecosystem. In doing so, UNI aims to be a fully public, self-sustaining infrastructure while preserving its indestructible autonomous qualities.

AAX is a digital asset exchange powered by LSEG Technology. AAX Academy is a user education channel created by AAX, which aims to help more users learn novice tutorials and understand the basics of blockchain.

About AAX Academy

AAX is a digital asset exchange powered by LSEG Technology. AAX Academy is a user education channel created by AAX, which aims to help more users learn novice tutorials and understand the basics of blockchain.