Uniswap Guide

Uniswap is a Decentralised Exchange (DEX) built on Ethereum. An Automated Market Maker, it allows users to trade crypto with no counterparty risk, middlemen or order books.

- Launch date: 2018
- TVL: US$ 3.19bn*
- Active users (daily) (30d average): 77.60k*

(*As of July 31, 2023)

Unlike centralised exchanges such as Binance or Coinbase, Uniswap does not rely on order books to list trades. On the contrary, its AMM model does away with intermediaries while providing a high level of security through decentralisation.

Uniswap is a key player in the Decentralised Finance (DeFi) sector. Thanks to its many use cases, both investors looking to make a passive income or trailblazing crypto innovators can use the protocol.

Liquidity Providers (LP) earn fees for contributing to liquidity pools, ensuring reliable liquidity for a wide variety of tokens.

Anyone holding UNI tokens can participate in Uniswap’s governance (by suggesting improvements or voting on proposals).

The Uniswap Protocol is made of a network of liquidity pools, which are smart contracts defining shared rules for trading assets. Each liquidity pool contains two assets, and their value is set relative to each other. As assets are bought/sold, their relative prices shift. Driven by an algorithmic principle, AMMs force token pairs to move along a smooth curve that aims to preserve the tension between supply and demand. 

In this system, traders interact directly with the pool, rather than with specific orders left by other parties - as is the case with centralised exchanges using order books. This also means that a Uniswap pool is always available to buy or sell a token, as there is no need to match trades with another counterparty.

Uniswap’s mechanism allows for a variety of use cases within DeFi:

• Swap assets. The most common way of interacting with the Uniswap protocol. Anyone with a crypto wallet can connect to the protocol to start swapping assets. 

• Create new markets. Traders wishing to exchange new assets can generate new liquidity pools thanks to smart contracts.

• Earn passive income through rewards. Liquidity providers earn a fee in UNI on every trade in the pool they contribute to.

Uniswap was born out of a 2016 Reddit post by Vitalik Buterin (one of Ethereum’s founders): what if smart contracts could be used to trade two tokens directly, without intermediaries? Hayden Adams, a former Siemens engineer (and current CEO at Uniswap Labs), took on the challenge. 

• November 2018: Uniswap v1 launches at Devcon, Ethereum’s worldwide conference.

• August 2020: Uniswap V2 is released, including new features and improvements, such as data oracles for price feeds and flash swaps.

• September 2020: UNI, Uniswap Protocol’s native token, goes live.

• May 2021: V3 launches, further expanding Uniswap’s utility in the DeFi space 

• April 2023: The Uniswap Protocol officially passes USD 1.5t  in trading volume

Uniswap V3 introduced 2 major updates:

• Concentrated liquidity. Liquidity Providers (LPs) are now able to “bound” the capital they invest within a specific price range.

• Multiple fee tiers. Four fee tiers - (0.01%, 0.05%, 0.30%, and 1%) replaced Uniswap v2’s flat rate of 0.30%.

These new features improved liquidity and capital efficiency, while allowing LPs to approximate their preferred risk-reward level.

Layer 2 networks are networks built on top of the main Ethereum network to offload operations (and reduce transaction costs without compromising on security). 

The Uniswap v3 Protocol is currently launched on three Layer 2 networks: Optimism, Arbitrum, and Polygon. This is a promising development as it paves the way for improved scalability. However, this integration is still in beta, and errors occurring on a Layer 2 might result in a total loss of funds.

Uniswap is the first-mover Automated Market Maker (AMM) and the largest Decentralised Exchange (DEX) by market cap. Yet, it still has competition, notably from Curve, regarding users, volumes and Total Value Locked (TVL).

Strengths 

• First-mover advantage. Uniswap was the first decentralised platform to use an automated market maker successfully (AMM) system, allowing it to build strong network effects over time. 

Market Leader. Uniswap is in the top two DEXs for volumes, LP fees, users and developers.

Weaknesses

• More complex adoption compared to CEX as it requires users to be in self-custody, use a standalone wallet and perform transactions.

• A positive feedback loop causes higher slippage and worsens price discovery and user experience.

Opportunities

• Accessible to all. Uniswap is a permissionless system, meaning anyone can participate without being vetted by a third party - unlike traditional financial services, which typically restrict access based on geography, wealth status and age. 

• DeFi rise. As the entire decentralised finance industry expands, Uniswap could consolidate its leadership position.

Threats

• Order books remain optimal for surfacing market prices and placing large orders, and they often provide a better trading experience. 

• Competition from other DEXs. Curve and PancakeSwap are still behind Uniswap, but they could overtake it.