Definition
Uniswap is a leading decentralized exchange (DEX) operating on the Ethereum blockchain, enabling users worldwide to trade cryptocurrencies without intermediaries. UNI, its governance token, allows users to vote on key protocol changes. As of August 2024, UNI remains one of the top cryptocurrencies by market cap, with a total value of over $8 billion.
Background and Evolution
Launched in November 2018, Uniswap was one of the first decentralized finance (DeFi) applications to gain significant traction on Ethereum. Since then, numerous other decentralized exchanges, including Curve, SushiSwap, and Balancer, have emerged. However, Uniswap continues to be the most popular, with a significant lead in trading volume. As of July 2024, Uniswap processed over $35.16 billion in monthly trading volume.
Uniswap pioneered the Automated Market Maker (AMM) model, where users supply Ethereum tokens to Uniswap “liquidity pools.” Algorithms then set market prices based on supply and demand, contrasting with centralized exchanges that use order books to match bids and asks.
What is UNI?
After years of successful operation and its path to complete decentralization, Uniswap introduced the UNI token to enable community ownership over the protocol. This allows stakeholders to vote on key protocol changes and development initiatives. When Uniswap released the token in September 2020, it used a unique distribution method, “airdropping” 400 UNI tokens to each Ethereum address that had used the protocol. Over 250,000 Ethereum addresses received the airdrop, valued at nearly $1,400 at the time. Airdrops have since become a popular method for DeFi apps to reward long-time users. Uniswap plans to distribute a total of 1 billion UNI over four years.
Benefits of Using Uniswap
By supplying tokens to Uniswap liquidity pools, users can earn rewards while facilitating peer-to-peer trading. Uniswap allows anyone, anywhere, to supply tokens to liquidity pools, trade tokens, or even create and list their tokens using Ethereum’s ERC-20 protocol. Hundreds of tokens are available on Uniswap, with popular trading pairs including stablecoins like USDC and Wrapped Bitcoin (WBTC).
Advantages of Decentralized Exchanges like Uniswap:
Safety:
Funds are never transferred to a third party, reducing counterparty risk as trades occur directly between users' wallets.
Global and Permissionless:
No borders or restrictions on who can trade; anyone with internet access can participate.
Ease of Use and Pseudonymous:
No account signup or personal details required.
Transaction Fees and Scalability Solutions
Users of Ethereum-based apps, including Uniswap, face transaction fees (gas fees) that can vary widely and be expensive. Several solutions are being developed to address this issue. The transition to the Ethereum 2.0 blockchain, completed in 2022, has aimed to improve scalability. Additionally, the rollout of “Layer 2” scaling solutions like Optimism has significantly reduced Uniswap transaction costs.
In early May 2021, Uniswap v3 launched, further improving transaction speed and cost efficiency.
Proliferation of "Swap" DEXs
Uniswap’s open-source nature allows anyone to see how it works and adapt the code to create competitors. This has led to the launch of numerous DEXs inspired by Uniswap’s code, including popular food-themed competitors like SushiSwap and PancakeSwap.
