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Uniswap Wikipedia

what is uniswap

This harmonious relationship between the automated market maker system and arbitrage traders is what keeps Uniswap token prices in line with the rest of the market. AMMs like Uniswap can provide crypto trading because of their liquidity pools. A liquidity pool is a pool of crypto funds, contributed by users, locked in a smart contract. Funds from the liquidity pool are used when people want to trade crypto.

Uniswap V2 also introduced the concept of Time Weighted Average Prices (TWAP), which made it easier for other decentralized applications to securely use prices from Uniswap. In response to the challenges faced by Uniswap V1, the Uniswap V2 was launched in May 2020 featuring several crucial improvements. Uniswap V2 adjusted its AMM model to include direct token-to-token swaps, leading to lower slippage and improved capital efficiency. For example, the default fee tier for Uniswap’s pool with USD Coin and Tether (USDT) is 0.01%.

Users will need to study carefully how a liquidity pool operates and learn what each “hook” does before engaging with the pool. New features like the time-weighted average market maker (TWAMM), limit orders, and dynamic fees could enable more advanced trading strategies that weren’t possible in previous versions. “Hooks” allow developers to add new functionalities to liquidity pools with great flexibility.

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Select the ‘Select a token’ icon and browse the list to find your token. Once you’ve connected your wallet, you can choose which network to swap, like Ethereum, Polygon, Arbitrum, Optimism, or others. To start using Uniswap, you’ll need to connect your Ethereum wallet to the platform. Uniswap supports a range of wallets, including the Uniswap Wallet, Metamask, Coinbase Wallet, and WalletConnect. It is governed by UNI token holders and stewarded by the Uniswap Foundation. The Uniswap blockchain is hosted on the Ethereum platform and governed by UNI holders.

For example, if you want to add $1000 worth of liquidity in the ETH-USDC pool, you’ll need $500 in ETH and $500 in USDC to do so. Aside from earning fees for providing liquidity to traders who can swap tokens, LPs should also be aware of an effect called impermanent loss. Let’s assume Alice is an LP who has deposited 1 ETH and 100 USDT into a Uniswap pool with a total liquidity of 10,000 (10 ETH x 1,000 USDT); the rest was funded by other LPs like her. Alice’s share in the pool is 10%, meaning her initial deposit comprises 10% of the pool’s total liquidity. Let’s say you deposit a trading pair to Uniswap’s liquidity pool as a liquidity provider (LP).

How Uniswap Works: Centralized vs Decentralized Exchanges

The Uniswap Protocol uses a constant product formula to determine the price of an asset. When a token is withdrawn (bought) from a pool, a proportional amount must be deposited (sold) to maintain the constant. The ratio of tokens in the pool, in combination with the constant product formula, ultimately determines the price of a token. In September 2020, Uniswap launched UNI, the network’s governance token, airdropping 400 UNI tokens to every wallet address that had interacted with the Uniswap protocol before September 1. As a result, the price of tokens on Uniswap can only change if trades occur. Essentially what Uniswap is doing is balancing out the value of tokens, and the swapping of them based on how much people want to buy and sell them.

Uniswap v2 was launched in 2020 and brought several improvements to the first version. One of the most significant changes was the introduction of ERC-20 to ERC-20 pairs, which meant liquidity providers could create pair contracts for any two ERC-20 tokens. Uniswap, as a decentralized exchange that uses blockchain technology, is considered to be secure. Smart contracts on the Uniswap platform are designed to be unalterable, although smart contract hacking can generally occur. The Uniswap platform experienced large-scale security breaches in 2023 that resulted in over a $25 million loss.

These platforms are governed by a single authority (the company that operates the exchange), require users to place funds under their control and use a traditional order book system to facilitate trading. The first version of Uniswap was launched on the Ethereum mainnet in November of 2018. The protocol was created as a way to facilitate the trading of ERC20 tokens.

You can buy or sell one token for another based on the current exchange rate. Additionally, you’ll see a network fee, which is the gas cost you can expect to pay to perform the swap. In May 2021, Uniswap V3 launched, with the latest iteration of the DEX adding a number of new features. First up is concentrated liquidity, which enables liquidity providers to allocate liquidity within a custom price range. That, in turn, means that traders don’t have to put as much capital on the line to achieve results. The vast majority of crypto trading takes place on centralized exchanges such as Coinbase and Binance.

  • The Uniswap Protocol’s code cannot be changed or modified and will run as long as the blockchain is functional, even if Uniswap Labs disappears tomorrow.
  • To do this, you’re going to need some ETH in your balance to pay for any transaction fees, as well as something to trade for the ERC20 token you want.
  • It is governed by UNI token holders and stewarded by the Uniswap Foundation.
  • With its strong start and continued prominence, the platform appears poised to serve as a central hub for decentralized trades on the Ethereum blockchain in the coming years.

Estimates by Uniswap show that Uniswap V4 could reduce pool creation gas costs by 99%. Each liquidity provider can choose whichever of the four fee tiers they want when depositing their crypto to a pool. These are often the cryptocurrencies where you can earn the highest rates, so it’s important not to choose a liquidity pool solely by the potential rewards. Pick out good cryptocurrency investments first, and then see if you can use them for liquidity mining. Liquidity mining is one of the most exciting aspects of Uniswap and other AMMs. Instead of just holding your crypto, you can earn more and grow your holdings.

Uniswap Governance: $UNI Token

To determine prices of tokens, Uniswap uses AMM’s to calculate based on supply and demand of the tokens. This process was necessary because the Uniswap V1 smart contracts only supported direct liquidity pools between ERC-20 tokens and ether (ETH). Way say that these market makers “make the market” because they’re continually there to buy and sell cryptocurrencies (provide liquidity) so that the exchange users will always have someone to trade against. Market makers make their money on “the spread” or the small difference between the quoted and the real market value of the cryptocurrencies they’re trading. Uniswap is an Ethereum-based decentralized cryptocurrency exchange (DEX) or a smart contract protocol that allows anyone to swap ERC20 tokens.

what is uniswap

Learn about the core concepts of the Uniswap Protocol, Swaps, Pools, Concentrated Liquidity and more. We have several resources to help you get started with the Uniswap Protocol. Uniswap Labs is a company that develops software products that work on top of the Uniswap Protocol. Uniswap Labs was founded by Hayden Adams, who developed the Uniswap Protocol. Uniswap Labs builds and maintains products like the Uniswap web app, NFT aggregator, and Uniswap mobile wallet.

Anyone can deposit their cryptocurrency into these pools and become a liquidity provider. Uniswap charges a small fee on every crypto trade, and it distributes that fee among all the liquidity providers for that pool. These funds are stored in liquidity pools, with each pool containing a pair of cryptocurrencies.

An Introduction to Uniswap V3

Uniswap responded by creating 1 billion UNI tokens and decided to distribute 150 million of them to anybody who had ever used the platform. Each person received 400 UNI tokens, which at the time amounted to over $1,000. With this system, a buyer or seller does not have to wait for an opposite party to appear to complete a trade. Instead, they can execute any trade instantly at a known price provided there’s enough liquidity in the particular pool to facilitate it. This has led some community members to criticize that the latest iteration of Uniswap is not really open-source. Both Uniswap V2 and Uniswap V3 require the vast majority of users to wrap their ETH to WETH before trading on the Uniswap Protocol, requiring extra gas.

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Uniswap is built on Ethereum, and its gas fees depend on how busy the network is. The Uniswap app is very user-friendly, so it doesn’t take long to learn how it works. It’s easy to connect a crypto wallet, swap one crypto for another, or deposit your crypto in a liquidity pool. Hence, each version brings improvements focused on maximizing returns difference between horizontal and vertical line for traders and liquidity providers, reducing price slippage, and minimizing user risks. Uniswap’s native token, UNI, was launched in September 2020 and has since been attracting users and LPs to the platform. UNI is an ERC-20 token, which means it was built on Ethereum and can be stored in any cryptocurrency wallet that supports ERC-20 tokens.

LEO Token

Nonetheless, LPs should be aware of the concept of impermanent loss before adding funds to a Uniswap pool. Uniswap is a DEX that lets users trade cryptocurrencies without depending on a central authority or intermediary, while maintaining censorship resistance. Operating on the Ethereum blockchain, Uniswap leverages smart contracts — self-executing programs on the blockchain with predetermined conditions directly written into code. Once you’ve chosen the tokens you want to trade, you can enter the amount you want to trade.

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It is very important to understand that when users trade on Uniswap, they aren’t interacting with other traders (peer-to-peer) but rather directly with the AMM smart contract (peer-to-contract). This unique approach is made possible through the automated market maker (AMM) or constant function market maker (CFMM) mechanism pioneered by the Uniswap protocol. One distinctive feature of DEX platforms is their user-friendliness (although a criticism is often that their front-end interfaces are lacking). Users are not required to create accounts or go through traditional sign-up processes. They simply need to connect their blockchain-based crypto wallets and can commence trading. Instead, trades are executed using smart contracts, while investors are responsible for the proper safekeeping of their funds.

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In return for providing liquidity, LPs earn trading fees generated by the pool. Anyone can become a liquidity provider, a transformative change to participating in financial markets. A decentralized exchange that’s low on funds is bad for traders and liquidity providers. Fewer trades means fewer fees, and the exchange’s liquidity providers don’t earn as much. Uniswap is a type of decentralized exchange known as an automated market maker (AMM).

  • This means that it is governed by a group of people rather than a single entity.
  • Uniswap has grown to be a leader in the DEX market, boasting significant trading volumes and deeper liquidity compared to other DEXs.
  • Although the exchange hasn’t faced legal issues yet, it and other decentralized exchanges without KYC could be first on the list in the future.
  • This means only a portion of the liquidity in the pool sits where most of the trading is taking place.

In the equation, x and y represent the quantity of ETH and ERC20 tokens available in a liquidity pool and k is a constant value. This equation uses the balance between the ETH and ERC20 tokens–and supply and demand–to determine the price of a particular token. Whenever someone buys Durian Token with ETH, the supply of Durian Token decreases while the supply of ETH increases–the price of Durian Token goes up. Currently, this fee option is turned off, however, if it is ever turned on it means LPs will start receiving 0.25% of pool trading fees.

This is expected to spur the emergence of innovative pools with customized trading features. Customization of liquidity pools via “hooks” can be boundless, ranging from using various on-chain oracles to depositing unused liquidity into lending protocols. Ultimately, “hooks” would offer developers significant flexibility to create liquidity pools customized to suit specific needs. Uniswap has grown to be a leader in the DEX market, boasting significant trading volumes and deeper liquidity compared to other DEXs. As of 2023, Uniswap ranks among the top DEXs based on various metrics such as trading volume, liquidity, and number of active users. They typically correspond to the volatility of the cryptocurrencies in the liquidity pool.

Uniswap is a decentralized exchange (DEX) that operates on the Ethereum blockchain. It allows users to trade various digital assets using an automated market maker (AMM) model, eliminating the need for traditional order books. It allows you to swap cryptocurrency tokens conveniently, and you don’t have to sign up for an account. You can also earn interest on your crypto holdings through Uniswap’s liquidity pools.

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