What Is Uniswap (UNI)?

Uniswap is one of the largest decentralized exchanges (DEX) running on the Ethereum blockchain. Its native governance token is the UNI.

Unlike well-established, centralized crypto exchanges (CEX) like Binance or Coinbase, the Uniswap protocol uses smart contracts to facilitate trading of ERC-20 tokens, acting as an automated market maker (AMM). Uniswap was one of the first DEXs to create an automated liquidity protocol to facilitate trades.

Let’s examine how Uniswap’s innovations have furthered the evolution of decentralized finance — a.k.a. DeFi — and how investing in UNI crypto might provide investors with a potential opportunity.

How Does Uniswap (UNI) Work?

Uniswap is a protocol on the Ethereum blockchain for swapping all ERC-20 tokens. Unlike centralized exchanges, which are set up to charge transaction fees, Uniswap is designed more as a tool for the community to trade tokens without platform fees or middlemen.

Uniswap uses an order-matching system known as the automated market maker (AMM) model. The AMM model, which powers most decentralized exchanges, does away with the traditional order book, which would contain all “bid” and “ask” (buy and sell) orders on an exchange. Rather than stating the current market price of an asset, an AMM conjures liquidity pools through smart contracts. The pools then execute trades according to preset algorithms.

What is an automated liquidity protocol?

The Uniswap protocol was one of the first decentralized exchanges to create a system of liquidity providers (or LPs) to help create more efficient markets via the use of smart contracts.

Smart contracts use blockchain technology to create transactions that execute automatically when certain conditions are met. By omitting any sort of middle man or third party, smart contracts are considered more secure and efficient.

On Uniswap, individuals and bots contribute liquidity to the exchange by adding pairs of tokens to smart contracts that can be traded by other users — thereby earning a percentage of the trading fees. For each trade, tokens are removed from the pool for an amount of the other token, thereby changing the price.

How do automated liquidity pools work?

Automated liquidity pools help solve the liquidity problem which is common to many centralized exchanges, where trades depend on having enough volume to meet the needs of buyers and sellers. Uniswap users are incentivized to pool their money in a fund that theoretically any trader can draw upon to complete a trade — and reap rewards, a process called yield farming. Because traders can buy and sell many different types of crypto, each token listed has its own liquidity pool; the prices are determined by smart contracts.

This DeFi yield farming method relies on liquidity providers to deposit funds into liquidity pools. These pools provide funding for DeFi users to borrow, lend, and swap tokens. Users pay trading fees, which are shared with liquidity pools based on how much liquidity they provide to the pool.

Advantages and Disadvantages of Uniswap (UNI)

As a pioneering DEX and one of the largest DeFi projects on the Ethereum blockchain, Uniswap has a number of pros and cons that investors should bear in mind. Because the UNI is a governance token of Uniswap, its value is likely to rise or fall with the popularity of the Uniswap platform.

Advantages

Uniswap is an open-source software platform, which means that it can be adapted by other users wishing to create DeFi projects.

Because it’s a DEX that uses an automated market maker model, users can contribute to liquidity pools and earn rewards this way. And because the DEX is built on the Ethereum blockchain, users can trade ERC-20 tokens easily and at a relatively low cost.

It’s native token, UNI, is one of the largest cryptocurrencies by market cap. The UNI token can be used to vote on changes to the platform.

As a decentralized exchange, Uniswap enables users to keep control over their crypto assets at all times. By allowing users to retain control of their private keys, it reduces the risk of those assets being hacked.

Disadvantages

Before you can use Uniswap, you need to buy crypto first. Uniswap doesn’t let you buy crypto using fiat money, such as the U.S. dollar. You must have crypto already in a crypto wallet that you connect to the exchange. While this is common among DEXs, it’s still inconvenient for users.

While Uniswap itself charges low fees, traders also pay Ethereum’s gas fees — basically the cost of executing transactions. Owing to the congestion on the Ethereum platform gas can be expensive, especially on smaller transactions.

While being able to stake tokens in liquidity pools can be a source of passive income, there is also the risk of impermanent loss. If the value of the tokens in the pool change, and even with a percentage of trading fees kept as a reward the value of the assets is now lower than it would have been if the user had kept it outside the pool.

A final point to consider is that Uniswap, as an AMM, is essentially permissionless — meaning that users aren’t required to fill out KYC forms (Know Your Customer), which reveal a lot of personal information. This may be considered a positive for some, but could be a red flag for regulators, as exchanges that don’t require KYC identification are more often subject to scrutiny. In September 2021, for example, the Securities and Exchange Commision opened a civil inquiry into the developer of Uniswap as to how investors are using the exchange, and how it’s being marketed.

Advantages	Disadvantages
• Uniswap is adaptable and open-source	• Users can’t use fiat currency, must buy crypto to trade or stake on Uniswap
• Users can contribute to liquidity pools to earn rewards	• Transaction fees (or gas) can be high
• Users can trade P2P on Uniswap and retain control over their private keys	• There is a risk of impermanent loss
	• Platform could be subject to greater scrutiny, owing to its lack of KYC policies.

Who Created Uniswap (UNI)?

The Uniswap platform was created in 2018 by Ethereum developer Hayden Adams, who was an engineer at Siemens prior to that (having graduated from Stony Brook in 2016). The project was built on top of the Ethereum blockchain, and was born out of a desire to bring AMMs to more users. Uniswap is also compatible with all ERC-20 tokens, the standard used for creating smart contracts on Ethereum.

The Uniswap token, UNI, is Uniswap’s native governance token. UNI wasn’t launched until 2020, and it plays a key role in the Uniswap network. UNI holders vote on proposals about the development of the software protocol and its ecosystem.

Why Was UNI Created?

UNI was created in September 2020 as an incentive for people to stay on the Uniswap platform instead of migrating to SushiSwap, a fork of Uniswap and a competing DEX. A month prior to the UNI token release, SushiSwap had encouraged Uniswap users to move over to SushiSwap by rewarding those who did so with SUSHI tokens.

In response, Uniswap created 1 billion UNI tokens and distributed 150 million UNI to those who had previously used the platform. Each individual received 400 UNI — worth about $1,400 at the time.

Why Does Uniswap (UNI) Have Value?

Uniswap is currently the largest DEX and has over $2.7 billion worth of crypto assets locked away on its protocol (TVL), as of Feb. 15, 2022.

Some cryptocurrency investors see Uniswap as a way to earn income. There are a handful of Uniswap liquidity providers who passively invest their assets in the liquidity pool to earn trading fees on the side. And there are also some Uniswap users who are building a business as market makers, using Uniswap and other software, and will develop custom tools to track their positions across different cryptocurrencies.

At the same time, software developers and other entrepreneurs are using Uniswap to develop new liquidity strategies, such as incentivized liquidity, or liquidity as collateral, which could power the next generation of cryptocurrency development.

Speculators also use Uniswap to trade tokens using its liquidity pools. Some of these speculators use arbitrage bots that compare prices across different platforms to profit from price discrepancies — a highly risky endeavor.

Price of Uniswap (UNI)

UNI is the 24th largest cryptocurrency, as of Feb. 15, 2022, with a market capitalization of about $6.97 billion.

Why Use Uniswap (UNI)?

Uniswap is an open-source protocol on the Ethereum blockchain — and it’s also one of the biggest decentralized exchanges and DeFi platforms. This combination offers users and investors a number of different opportunities.

From a trading perspective, investors can swap any number of ERC-20 tokens using smart contracts — so there’s no third-party risk (because there’s no middleman involved, it’s strictly P2P).

Also, thanks to Uniswap’s liquidity protocol, users can also become liquidity providers. By supplying tokens to Uniswap liquidity pools, users can earn rewards while enabling P2P trading. Just remember that you need crypto to access Uniswap’s platform and features; you can’t trade or make transactions using fiat currency. Users can also trade tokens, or even create and list their own tokens (using Ethereum’s ERC-20 token protocol). There are currently hundreds of tokens available on Uniswap.

Owning UNI also offers users the chance to participate in the Uniswap community and vote on proposed changes to the platform. This is a relatively recent event, as the UNI token didn’t launch until 2020.

Does Uniswap (UNI) Have Staking?

Yes. You can stake UNI on the Uniswap platform by becoming a liquidity provider, contributing ERC-20 tokens to liquidity pools and earning rewards based on a portion of the transaction fees.