Uniswap is an exchange-like protocol that permits users securely interchange ERC20 tokens without having to apply the usual exchange order book model. Uniswap bundles tokens into specific smart contracts, creating liquidity pools within which other members can habituate. Anyone can exchange tokens, add tokens to the pool, receive a commission, or create a new trading pair.
Hayden Adams has created Uniswap. He was motivated to form this protocol by a post made by Vitalik Buterin. On November 2, 2018, Uniswap was publicly announced and deployed to the Ethereum mainnet.
Unique features of the platform
Uniswap’s chief distinction from other decentralized exchanges is the use of a pricing mechanism named the “Constant Product Market Maker Model.”
Any crypto can be added to Uniswap by funding it with an equivalent value of ETH and the ERC20 token being traded. For example, if you wanted to make an interchange for an altcoin called Poop Token, you would launch a new Uniswap smart contract for Poop Token and create a liquidity pool with–for example–$10 worth of Poop Token and $10 worth of ETH.
Where Uniswap varies is alternatively from joining buyers and sellers to fix the price of Poop Token, Uniswap uses a constant equation: x • y = k.
Here is what the equation shows: x and y are the number of ETH and ERC20 tokens that are available in a liquidity pool, and k is a constant value. It manages the balance of supply and demand of ETH and ERC20 tokens for determining the cost of a particular crypto. Whenever Poop Token is purchased with ETH, the supply of it shrinks while the supply of ether increases – the price of Poop Token goes up.
As a consequence, tokens change their cost on Uniswap only when trades happen. So what is the platform doing? It is setting out the value of tokens, and their exchange is happening based on how much people want to negotiate them.
There is no permission required for ERC20 token to be listed on this platform. Every token has its pool and smart contract. If there is no liquidity pool for any token the platform lets to create it very smoothly. Once a token has its exchange smart contract and liquidity pool, anyone can trade the token or contribute to the liquidity pool while earning a liquidity provider fee of 0.3%. To add to a liquidity pool, you need an equal value of ETH and ERC20 tokens.
How are Uniswap tokens added?
The developers of the Uniswap project, having decided not to use their token (for example, the Hydro Protocol eliminated the native token by forking in the 0x protocol), focus on changing attitudes towards the token economy.
Just over a year ago, especially during the ICO mania, most crypto protocols were implementing their tokens, expecting their value to rise. However, most of these tokens are only used as a medium of exchange on their network - a model that is unlikely to increase its profitability in the long run but will only add friction.
0x is an example of a great project that has a flawed token model. By all accounts, the 0x exchange provides a valuable piece of crypto infrastructure and is backed by large investors. However, there is no clear criterion for evaluating ZRX tokens, however, there is a lot of controversy about whether the protocol will gain any meaningful value in the long term - even if 0x ultimately leads to an accelerated increase in trade volumes.
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The chief function of the ZRX is to use a protocol-level governance model, rather than a consensus-based model that defines evaluative principles. The fact that order books are maintained by centralized retranslators, and liquidity is at a premium, only exacerbates the problem. For companies that are building their work on the 0x protocol, it makes no sense to make a significant investment when they can spend one time on the protocol to make the desired changes. The essential question is, what is stopping repeaters from vertically integrating the market if they are in charge of the client-side, which is fundamental? It is important to note that 0x is working on ways to provide a liquidity pool to mitigate this problem.
When new ERC20 or ETH tokens are being added to a liquidity pool of the platform, the contributor receives a pool token, which is also an ERC20 token. You can use pool token as a common ERC20, which means it can be exchanged, sent to another address, or used in a dApp. These tokens are created whenever funds are deposited into the pool. When funds are reclaimed, the pool tokens are burned or destroyed. Each pool token represents a user’s share of the pool’s total assets and part of the pool’s 0.3% trading fee. How can you use Uniswap?
The Uniswap protocol can be accessed through its front-end at uniswap.exchange. From there, anyone with an Ethereum wallet such as MetaMask can swap tokens or add tokens to a Uniswap liquidity pool.
Since Uniswap is an open protocol of smart contracts, anyone can build a front-end user interface on top of it. For example, InstaDApp allows you to add funds into Uniswap pools without needing to access the official Uniswap user interface. New interfaces such as DeFiZap enable users to add funds to Uniswap pools using just ETH instead of ETH and another token. The interface even offers simple one-click solutions for purchasing pool tokens in combination with bZx token strategies.
At this rate, we should expect to see many more integrations between Uniswap’s unique token swapping system and new DeFi products in the coming years.
Uniswap is proof that you don't always need a native token to become a prosperous decentralized exchange. Users implementing valuable work (liquidity) to the Uniswap protocol are compensated for their attempts, shared liquidity pools formulate network effects, but, there is no native token through which the operations are administered.