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What is Uniswap and how does it work?

by BlockchainX 3 months ago in product review

How has Uniswap achieved this? What technology is behind your design? This and much more you will know below.

What is Uniswap and how does it work?

One of the most well-known decentralized exchange (DEX) protocols in the blockchain world is Uniswap, and it is no wonder, because this protocol has become one of the largest DEXs in the crypto ecosystem, with a blocked value that amounts to 5 billion dollars. With this, Uniswap becomes one of the main opponents of centralized solutions, and leaves behind the belief that this type of technology could not become truly viable.

What is Uniswap?

Uniswap is a DEX (Decentralized EXchange or Decentralized Exchange), which allows you to exchange your cryptocurrencies for others, using smart contracts on the Ethereum network. This fact already tells us one thing: Uniswap works with Ethereum ERC-20 tokens . Let us remember that an ERC-20 token is a type of standard token within Ethereum and of these types of tokens there is a great variety. In fact, there are currently more than 420,000 different ERC-20 tokens on Ethereum, which gives us an idea of the huge ecosystem that exists. It is precisely this point, which led Uniswap to its immense success: there is an immense community that needs this exchange functionality and, if you can make money with it, all the better.

However, as Uniswap only works with ERC-20 tokens, it is severely limited in functionality. For example, you cannot make direct exchanges using other cryptos, such as Bitcoin or Bitcoin Cash. To overcome this limitation, other projects have dedicated themselves to creating ERC-20 tokens that represent these other cryptocurrencies. To do this, 1: 1 anchored ERC-20 tokens are created with that specific crypto, or using other means. A good example of this is RenBTC, where RenBTC is an ERC-20 token anchored 1: 1 with the value of Bitcoin, and guarded by a decentralized network of nodes. Thus, each RenBTC token can be exchanged 1: 1 with BTC (except for a small commission) and, you are sure that it will always be like that.

Thanks to this, something exceptional is achieved: allowing Uniswap to carry out exchanges that can then be transferred to other cryptocurrencies. And, although the exchange is not direct, this offers a unique range of opportunities, which not only Uniswap has taken advantage of. In fact, it is thanks to things like these that the DeFi or Decentralized Finance ecosystem has not stopped growing from 2019 to the present day.

How does Uniswap work?

Uniswap is today much more than just a DEX. First of all, we have that Uniswap was created as an AMM protocol (Automated Market Maker or Automated Market Maker). This means that Uniswap is able to allow its users to create markets from which third parties can benefit. The creation of these markets is self-sustaining, allowing the protocol to generate income that serves to incentivize the injection of liquidity in exchange for a small interest to its investors. They are the well-known pools, where investors inject tokens to increase its liquidity, and as it is used by third parties, these transactions generate commissions that are used to maintain the protocol and give rewards to investors in said pool.It is, in short, the germ of the well-known liquidity mining.

Second, the creation of these pools allows the protocol to amass liquidity to allow rapid exchange of assets . This exchange system is controlled by smart contracts (like the rest of the Uniswap protocol functions), giving rise to its DEX functionalities. And finally, building around these two functions a complex system of rewards, decentralized governance and complementary functions within the increasingly relevant DeFi ecosystem.

What is the UNI or Uniswap Coin token?

The arrival of competitors like SushiSwap (a Uniswap clone), with its application of yield farming thanks to its SUSHI token, made the SushiSwap community respond, and the best response was to launch its own token: the UNI token or Uniswap Coin. Thus, on September 16, 2020, Uniswap announces the launch of this new token designed on three fundamental points:

Offer a new reward mechanism for participating in Uniswap pools and services.

Reward those who believed in the project from the beginning.

Allow a more Decentralized on-chain governance system.

With that idea in mind, the project created in its genesis the issuance of 1 billion UNI tokens that will be accessible within the next 4 years (until 2024). These tokens would be distributed as follows:

60.00% to members of the Uniswap community (600,000,000 UNI)

21.266% for team members and future employees with a vesting period of 4 years (212,660,000 UNI)

18.044% to investors with a period of acquisition of rights of 4 years (180,440,000 UNI)

0.69% to advisers (6,900,000 UNI)

After 4 years, the UNI token would continue its issuance with a perpetual inflation rate of 2% per year. The idea is that the system allows to continue rewarding those who participate in the growth of Uniswap as an ecosystem.

However, UNI would also create a treasure trove for the project, so that the necessary funds will be available to further develop Uniswap. In that sense, 4 3% of the community tokens would be retained for this effort. This could create taxpayer grants, community initiatives, liquidity mining, and other programs that drive Uniswap's development. That 43% would be distributed over that 4-year period as follows:

First Year: 172,000,000 UNI 40%

Second Year: 129,000,000 UNI 30%

Third Year: 86,000,000 of UNI 20%.

Fourth Year: 43,000,000 UNI 10%

This ensures that the community will always be rewarded for its efforts.

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