Uniswap is a decentralized cryptocurrency exchange. Built on the Ethereum blockchain, it is a Decentralized Finance(DeFi) product that uses smart contracts to facilitate peer-to-peer trades and ERC-20 token swapping. It is an open-source project that relies on an automated liquidity protocol trading model.
Unlike centralized exchanges which are controlled by one company, users retain control of their assets on Uniswap. Since the funds are never handed over to a third party on Uniswap, there is hardly any possibility of the funds being lost if the system is hacked.
In its own words, Uniswap is a place where developers, traders, and liquidity providers come together to participate in a financial marketplace that is open and accessible to all. With a trading volume of more than $1.2 trillion, 300+ integrations, and more than 4,400 community delegates, Uniswap(V3) is the second-largest decentralized cryptocurrency exchange as per CoinMarketCap.
Uniswap Overview
Uniswap was launched in 2018 by Hayden Adams a former mechanical engineer at Siemens. It is based on the idea of an automated market maker and was first suggested by Ethereum founder Vitalik Buterin.
Uniswap received investment from multiple venture capitalists including Andreessen Horowitz, Paradigm Venture Capital, Union Square Ventures and ParaFi. It also received a grant of $100,000 from the Ethereum Foundation.
The native coin of Uniswap is called UNI and it is an ERC-20 token. Anyone who holds the UNI token can take part in governing the Uniswap protocol. Since it enables UNI holders to vote on changes to the protocol, it effectively establishes active community ownership over the Uniswap protocol.
Uniswap did something unexpected in 2020 when it decided to distribute UNI by airdropping 400 UNI tokens to every Ethereum address that had ever used Uniswap before September 1, 2020.
As of December 2022, Uniswap(V3) is the second-largest decentralized cryptocurrency exchange by market cap. The UNI token has a maximum supply of 1 billion tokens and a circulating supply of approximately 762 million UNI in December 2022.
Uniswap Versions
Uniswap is an open-source project built on Ethereum. By eliminating the need for intermediaries, it provides an efficient exchange mechanism for crypto traders.
The platform has from time to time implemented upgrades that improved upon the previous versions. It has had three versions so far- V1, V2, and V3.
Uniswap V1
Launched in November 2018, Uniswap’s Version 1 added support for ERC-20 tokens using the Uniswap factory. It was proof-of-concept based and users could trade ERC-20 tokens in a single transaction. A liquidity-sensitive automated pricing system that used constant product formula was in place i.e. X*Y= K where,
X- First asset’s reserve
Y- Second asset’s reserve
Liquidity is to be added in such a way that K experiences no change.
The main limitation of Uniswap V1 was that it only supported ETH-ERC20 tokens. Traders had to do double transactions for swapping tokens. For example, for trading USDT and DAI, USDT had to be first swapped for ETH which was then traded with DAI.
This meant that only were the traders paying gas fees twice, but they were also vulnerable to impermanent loss due to ETH price fluctuations.
Uniswap V2
Uniswap’s Version 2 was launched on the Ethereum mainnet on May 19, 2020. It included many new features that improved Uniswap’s existing technology.
The significant change brought by V2 was the introduction of ERC-20 token/ERC-20 token pools. This means that exposure to ETH was no longer necessary for swapping assets. This version also implemented manipulation-resistant on-chain price feeds. These price feeds are critical for DeFi apps to be safely used as price oracles.
Flash Swaps is another new feature added by Uniswap V2. They allow users to borrow any ERC-20 token they want at no upfront cost, use it for anything they want to do and at the end of the transaction execution, pay for the tokens withdrawn or return them. There is also an alternative to only pay for a certain percent of ERC-20 tokens and return the rest.
Uniswap V3
Uniswap’s Version 3 was introduced in 2021, just one year after the launch of V2. With V3, Uniswap became the most flexible and efficient automated market maker(AMM) ever designed.
It introduced multiple fee tiers for liquidity providers(LPs) among other things. Concentrated Liquidity gives individual LPs control over what price range their capital is allocated to. They could greatly increase their exposure to preferred assets and reduce downside risk.
Apart from cheaper gas fees, Uniswap V3 also made oracles cheaper and easier to integrate.
How does Uniswap work?
On Uniswap, there is no central order book to match buyers and sellers. In place of that, it works using a protocol known as Automated Market Maker(AMM). AMM is a collection of smart contracts that detail how liquidity pools are to be created, how liquidity is to be provided, and the standard way to swap assets.
Liquidity Providers(LPs) deposit an equivalent value of two tokens to create a market. Since Uniswap is based on the Ethereum blockchain, either ETH or any ERC-20 token has to be deposited. LPs then get liquidity tokens to help keep track of the duration and amount of liquidity provided. This comes in handy when the fee is to be distributed among the LPs as per their contribution.
This whole process is automated and because there are no intermediaries, central order book or private order matching engine, it is more resistant to manipulation and system attacks as compared to centralized exchanges.
Liquidity Pools
In traditional finance or even centralized cryptocurrency exchanges to some extent, order books are used to create trades and match buyers and sellers. But decentralized exchanges like Uniswap don’t have order books. Users transact directly among themselves. These Automated Market Maker(AMM) platforms rely instead, on liquidity pools to create liquidity on the platform.
A liquidity pool refers to a group of digital assets locked together in a smart contract. A mathematical formula is used to determine the price of the tokens in the pool. Uniswap uses the formula X*Y=K where X and Y represent the two tokens in the pool.
The liquidity providers i.e.the people who provide their crypto for creating liquidity are compensated for staking their assets. It can either be in the form of crypto or a percentage of the transaction fee charged. On Uniswap, the fee for swapping tokens is divided among the liquidity providers as per their contribution.
Uniswap Fees
On Uniswap v2, there was a 0.3% fee for swapping tokens which were distributed among the liquidity providers in proportion to their contribution. Uniswap v3, however, introduced multiple pool fee tiers. There are multiple pools for each token pair and each has a different swapping fee.
The three fee levels are 0.05%, 0.30%, and 1%. Stable/stable pairs like USDC/USDT obviously fall in the lowest tier of 0.05%. Stable/blue chip pairs like USDC/ETH lie in the middle category of 0.30%. Wild or exotic pairs like say, ETH/DOGE attract the highest fee of 1%. In addition to that, a 0.01% fee level was also added after a governance proposal in November 2021.
Is it safe to use Uniswap?
Uniswap is built on blockchain technology. Therefore, tampering with the records on it is very difficult. Plus, Uniswap being a decentralized exchange provides another layer of security for users’ crypto. Since the user is in control of his private keys, any hack of the Uniswap servers would not result in a loss of crypto for its customers.
Uniswap’s code is open-source and it is committed to improving on any potential security issues that come up. Towards that end, Uniswap Labs runs a Bug Bounty where anyone can report previously-unreported bugs in any deployed Uniswap contract. The incentives depend on the severity of the bug reported and are evaluated to be up to 2,250,000 USDC.
However, this does not mean Uniswap is fully tamper-proof. Vulnerabilities in smart contracts can always be exploited for nefarious purposes. Additionally, while Uniswap’s decentralized nature means that no third party controls the private keys, it doesn’t prevent the funds from being lost due to scams and phishing attacks.
In July 2022, a liquidity provider on Uniswap lost more than 7,500 ETH(estimated $8 million) after falling victim to a fake Uniswap token airdrop. There is no verification process and tokens can be directly listed on the exchange. Scammers can take advantage of this system and part people with their money by baiting them with fake coins.
It is, therefore, important to do due research on any project on Uniswap before investing in it. This is all the more important because cryptocurrencies exist in a legal grey area in most territories and investors might not recover their funds if they are lost.
Pros of Uniswap
User Control over Funds
Since Uniswap is a decentralized exchange, the user does not need to transfer their assets to a third-party custodian, as is the case with centralized exchanges. This means that users are in control of their digital assets and the possibilities of asset loss in case of a system breach are very low.
Privacy and Anonymity
There is no lengthy signup or registration process for Uniswap. All users have to do is connect their crypto wallet to the exchange. This is perfect for users who want privacy while trading in crypto.
Easy to Use
Uniswap’s interface is simple and beginner-friendly. Users would find it easy to navigate and quickly get a hang of the way it works.
Access to ERC-20 Tokens
Uniswap token UNI is an ERC-20 token. This means that it can be easily swapped with any digital asset built on Ethereum. Considering the size and popularity of Ethereum, this allows Uniswap users to trade in a multitude of cryptocurrencies.
Liquidity Mining
Users can earn crypto on Uniswap by depositing their cryptocurrency stake in a liquidity mining pool. The liquidity miners in the pool get a share of the fee charged by Uniswap for every crypto trade for the pool.
Focus on Community Governance
Uniswap functions through a system of “community governance”. Any change in the protocol has to be voted on by UNI holders before the developers can implement it. This effectively makes the Uniswap community in charge of the Protocol’s governance.
Cons of Uniswap
No Verification Process
The fact that there is no KYC requirement for Uniswap can be a perk and a drawback depending on the perspective. While this means users maintain anonymity while trading, this also makes the platform ripe for misuse by malicious actors. Not to mention a number of regulatory issues that it could run into.
Fiat Currency Not Accepted
One drawback of Uniswap is that you cannot buy crypto with fiat money on it. You would have to buy your crypto elsewhere and then connect your wallet to Uniswap to trade. This can be a hassle for many people.
High Gas Fees
Uniswap is built on Ethereum which is known for its scalability problems. As network congestion increases, the gas fee on Ethereum also increases. Consequently, the gas fees on Uniswap can also get prohibitively high.
This might however change with Ethereum’s Merge upgrade and the launch of Uniswap V3.
Problem of Scams
Coins can be directly listed on Uniswap. This means that while users can get early access to many new coins, there is no vetting process for the same. This can lead to users inadvertently putting their money in coins that are nothing but scams.
Uniswap Customer Reviews
Uniswap has an FAQ section where users can find answers to their queries. If they are not satisfied, they can also submit a request or get help on Uniswap’s Discord channel. There is also an option to chat with a chatbot to find a solution to the user’s problem.
Uniswap has a rating of 1.5 out of 5 on Trustpilot with 108 reviews. Customers praise it for its user-friendly UI/UX and easy-to-use structure.
Uniswap is praised for its minimalist and simple design
Some users however had bad experiences with its liquidity pools and incidents of impermanent losses have been reported.
Uniswap needs to provide more information about the working of liquidity pools
There have also been incidents of failed transfers, extremely high gas fees and unhelpful customer support on Uniswap.
Customers complain about Uniswap’s gas fee which can be prohibitively expensive
Uniswap Frequently Asked Questions
Is it expensive to use Uniswap?
Uniswap is built on the Ethereum blockchain. The transaction fees on Ethereum are based on gas price and gas limit. As the network traffic grows, so does the gas fee. Therefore, as the use of the Ethereum network rises during peak hours, the transaction fee on not just Uniswap but other Ethereum-based exchanges also rises.
Is Uniswap a Coin?
No, Uniswap is not a coin but a decentralized cryptocurrency exchange. It is a DeFi product built on the Ethereum network. It facilitates peer-to-peer trades with the help of smart contracts. It does, however, have a native token called UNI which is an ERC-20 token.
How many people use Uniswap?
Uniswap crossed $1 trillion in trade volume in 2022. However, its user base was still relatively small at around 3.9 million users in May 2022. This indicates that the exchange still has lots of potential for growth.
Which wallet works with Uniswap?
You can use any Ethereum crypto wallet for Uniswap. Most popular cryptocurrency wallets like Coinbase Wallet, MetaMask, and Trust Wallet are compatible with Uniswap.
Final Verdict
Uniswap is the second-largest decentralized cryptocurrency exchange by market cap. One of the original DeFi apps that gained significant popularity on Ethereum, Uniswap boasts a trading volume greater than $1 trillion and more than 125 million all-time trades.
It gives users easy access to a number of digital assets and ensures privacy while trading. It is a global platform with no restrictions placed on trading. You just need a device with an internet connection to participate in the protocol. You can also earn passive income on your crypto by entering liquidity mining pools.
However, Uniswap’s decentralized nature also means that customers have to be cautious while using it. The possibility of scams and rug-pull projects is heightened in the absence of a coin vetting process. Also, keep in mind the general price volatility of cryptocurrencies before making any decision.