A beginner's guide to Uniswap that will help you understand the UNISWAP cryptocurrency, protocol and decentralised exchange (DEX).
UNISWAP crypto, also known as UNI, is an Ethereum-based ERC-20 governance token that was created by the Uniswap decentralised exchange (DEX).
UNI holders can participate in the decision-making process of the Uniswap protocol, such as proposing changes to the platform or voting on proposals made by others.
While the naming conventions can be confusing, this is different to the Uniswap decentralised exchange (DEX) itself.
Operating on the Ethereum blockchain, it was created in 2018 by Hayden Adams and allows users to trade cryptocurrencies, without the need for a central authority or intermediary.
Our Uniswap guide will provide an in-depth look at both UNISWAP the governance token and Uniswap the decentralised exchange.
Discussing how the two are interconnected and form a powerful Ethereum-based DeFi ecosystem.
Introduction to Uniswap
Let’s start by introducing the main differences between UNISWAP the cryptocurrency and Uniswap the decentralised exchange (DEX).
UNISWAP crypto and protocol
UNISWAP cryptocurrency, also known as UNI, is a governance token that allows holders to participate in the decision-making process of the Uniswap protocol.
UNI holders can vote on proposals for changes to the protocol, such as modifying the fees collected by the platform or adding new features.
Uniswap Decentralised Exchange (DEX)
On the other hand, Uniswap DEX is a platform that allows users to trade cryptocurrencies directly with one another without the need for a centralised intermediary.
The platform uses an automated market maker (AMM) algorithm to determine the prices of different assets, and users can provide liquidity to different pools of tokens in order to earn trading fees.
In other words, while UNISWAP crypto represents ownership in the Uniswap protocol and allows for governance participation, Uniswap DEX is the actual platform where users can trade cryptocurrencies and earn fees by providing liquidity.
Understanding these distinctions is crucial for anyone trying to answer what Uniswap is.
How does Uniswap work?
In this section of our Uniswap guide, we'll explore how the UNISWAP governance token and automated market maker (AMM) work together.
Uniswap AMM
Uniswap works by using an automated market maker (AMM) algorithm to determine the prices of different assets.
This algorithm is based on the constant product formula, which maintains a constant ratio of tokens in a liquidity pool.
Users can trade one token for another by swapping them in the liquidity pool, without the need for a traditional order book or matching engine.
When a user wants to make a trade, they send a transaction to the Ethereum network, which interacts with the Uniswap smart contract to execute the trade.
The smart contract calculates the amount of tokens that will be exchanged based on the current price determined by the AMM algorithm and deducts a small fee from the trade which is distributed to liquidity providers.
To provide liquidity, users can deposit an equal value of two tokens into a liquidity pool, which will create a market for those tokens on Uniswap.
By doing so, they earn a portion of the trading fees generated by the pool in proportion to their contribution.
Uniswap also employs a decentralised governance system through its UNISWAP token, allowing token holders to propose and vote on changes to the protocol.
Such as adding new tokens or changing trading fees.
Uniswap's automated market maker algorithm and decentralised governance system provide a unique and efficient way for users to trade cryptocurrencies without the need for a centralised intermediary.
UNISWAP crypto and protocol
In addition to providing a decentralised exchange platform, Uniswap also utilises its governance token, UNISWAP, to enable its community of token holders to have a say in the development of the platform.
UNI holders can submit proposals and vote on governance decisions related to the protocol.
Such as adding new tokens to the platform or changing the trading fee structure.
When a proposal is submitted, UNI holders can vote on it by staking their UNI tokens in support of the proposal.
The more tokens staked in favour of a proposal, the higher the chance of the proposal being accepted.
UNI holders can also delegate their voting power to other addresses if they choose not to vote directly.
As for the trading process on Uniswap, users can trade one token for another by swapping them in the liquidity pool.
The price of each token is determined by the AMM algorithm based on the ratio of tokens in the liquidity pool.
When a user makes a trade, a small fee is charged, and a portion of that fee is distributed to liquidity providers as a reward for contributing to the pool.
By providing liquidity to a pool, users can earn a share of the trading fees generated by the pool, which are paid out in the form of the tokens that are traded on the platform.
This incentivizes users to contribute to the liquidity of the platform, which in turn improves the overall user experience by ensuring that there is always sufficient liquidity available for trading.
As you can see, Uniswap's automated market maker algorithm, decentralised governance system, and incentivized liquidity provision model create a powerful ecosystem for decentralised finance (DeFi) on the Ethereum blockchain.
Who are Uniswap Labs?
Uniswap Labs is the development team behind the Uniswap protocol.
It was founded by Hayden Adams in 2018 and has since become one of the most widely used decentralised exchange platforms in the cryptocurrency industry.
Uniswap Labs is responsible for developing and maintaining the Uniswap codebase, as well as providing updates and new features to the platform.
The team is also involved in the research and development of new decentralised finance (DeFi) solutions on the Ethereum blockchain.
There have been some concerns about the actual decentralisation of Uniswap, particularly with regard to the decision-making process for the platform.
While the Uniswap protocol is decentralised in that anyone can create a liquidity pool and trade on the platform, the development of the protocol and the decision-making process for the platform are largely controlled by Uniswap Labs.
This centralisation of power has led some critics to question the true decentralised nature of the platform, as it could potentially allow for censorship or manipulation of the protocol by Uniswap Labs or other centralised entities.
However, the UNISWAP governance token and voting system are designed to address these concerns by giving token holders a say in the future development of the platform.
Additionally, the Uniswap protocol is open source, meaning that anyone can review the code and propose changes to the protocol.
Did the US regulator make Uniswap Labs remove tokens?
In case you missed it, Uniswap Labs has decided to remove a selection of tokens from its app.uniswap.org interface.
Today, consistent with actions taken by other DeFi interfaces, we have taken the decision to restrict access to certain tokens through app.uniswap.org.
On the surface, this looks like excellent progress for the DeFi industry and shows a strength of Ethereum that dApps built on the network can achieve this level of decentralisation.
But after taking a look at the discussion on Twitter, I was shocked at the amount of pushback this decision was receiving.
Why Uniswap Labs removed the tokens
As the largest decentralised exchange (DEX) in terms of trade volume, there was always going to be a reaction of some sort.
But as I said above, I really didn’t expect the pushback we’ve seen.
Uniswap Labs ultimately made the decision because as a US regulated company and hosted website, they didn’t want to fall foul of their regulator for offering securities trading.
However, the Uniswap Labs company is not the Uniswap Protocol allowing decentralised trading.
Uniswap users can still swap all of the tokens that Uniswap Labs has removed from their interface, directly or by using another front-end.
The company behind the platform, Uniswap Labs, simply removed those tokens from their own interface.
That’s it.
Uniswap Labs the company, vs Uniswap the protocol
Let’s take a look at the key differences between the two.
The Uniswap Protocol: Is the back-end that allows fully decentralised, permissionless smart contracts on Ethereum.
The Uniswap App: Is the privately-owned (by Uniswap Labs) domain that points to an IPFS hosted instance of the Uniswap Interface.
So while the US regulator may be able to touch the US privately owned and run front-end, they can’t touch the Uniswap protocol back-end.
Users are therefore able to make a decision on which front-end they choose to use between a US regulated one or an offshore one.
The US regulated front-end may be safer, but it will be extremely limited.
An offshore front-end may allow you to trade whatever you want, but it could be shady.
The point is that as a DEX, you’re able to make that choice yourself.
A comparison with Hive and LeoFinance
As I’m publishing this blog on LeoFinance, let’s take a look at a comparison to our own decentralisation capabilities here on Hive.
The Hive Protocol: Is the back-end that allows decentralised apps to run on the decentralised Hive blockchain.
The LeoFinance App: Is the privately-owned domain that acts as a social media front-end for our community.
So while LeoFinance may be able to censor you on this front-end, your data remains tied to your immutable account on the Hive blockchain.
You’re still able to choose to display that data via another Hive front-end, that doesn’t follow the same community rules.
This is the power of Web3.
Final thoughts on the Uniswap decision
What Uniswap’s decision should do, is make you reconsider the role of national financial regulators, within a globally decentralised future framework.
The future is now and we can see that this decision actually doesn’t protect US traders at all, but instead forces them onto more questionable, offshore interfaces or exchanges.
Regulators need to start considering that people can and will continue to use DEXs and they should be helping to facilitate access to the best and educating on the worst.
Not just regulating the good players away.
Give your people some credit.
What is UNISWAP crypto (UNI) used for?
As mentioned in the above section of our guide, the UNISWAP governance token (UNI) is primarily used for voting on proposals related to the development of the Uniswap protocol.
UNI holders can submit proposals and vote on changes to the protocol, such as adding new tokens or adjusting trading fees.
In addition to its governance role, UNI also has some utility within the Uniswap ecosystem.
For example, users who hold UNI can participate in liquidity mining programs, where they can earn additional UNI tokens by providing liquidity to specific trading pairs on the platform.
UNI can also be used to pay trading fees on the platform, with a discount applied for those who use UNI to pay fees.
Outside of the Uniswap ecosystem, UNI can be traded on various cryptocurrency exchanges and used as a means of payment or store of value like other cryptocurrencies.
Uniswap pros and cons
Here are 5 pros and cons of Uniswap.
Pros of Uniswap
- Decentralisation: Uniswap is a decentralised exchange (DEX), which means that it operates on a blockchain and doesn't rely on a central authority to hold users' funds or facilitate trades. This provides users with greater control and security over their funds.
- Access to a wide range of tokens: Uniswap supports a wide range of cryptocurrency trading pairs, including many newer or less well-known tokens that may not be available on centralised exchanges. This can make it a good option for users looking to trade more obscure or niche cryptocurrencies.
- No KYC/AML requirements: Unlike centralised exchanges, Uniswap doesn't require users to complete Know Your Customer (KYC) or Anti-Money Laundering (AML) checks. This can be attractive to users who value their privacy and want to avoid sharing personal information.
- Liquidity provision incentives: Uniswap's liquidity provision model incentivizes users to provide liquidity to the platform, which can result in greater liquidity and tighter bid-ask spreads for users.
- Transparent and auditable: Uniswap operates on a public blockchain, which means that all transactions are transparent and auditable. This can help to build trust in the platform and reduce the risk of fraud or manipulation.
Cons of Uniswap
- Higher fees and slippage: DEXs like Uniswap tend to have higher fees and slippage (the difference between the expected and actual price of a trade) than centralised exchanges, particularly for larger trades or illiquid trading pairs.
- Security risks: While Uniswap's decentralised model provides greater security than centralised exchanges in some ways, there are still risks associated with using the platform. For example, smart contract bugs or other security vulnerabilities could result in the loss of users' funds.
- Limited functionality: Compared to centralised exchanges, Uniswap has limited functionality, such as the ability to place limit orders or use margin trading.
- Complexity: For users who are new to cryptocurrency trading or blockchain technology, Uniswap's decentralised model and unique liquidity provision system can be confusing and difficult to navigate.
- Market volatility: Like all cryptocurrency trading, using Uniswap involves exposure to market volatility. Prices can fluctuate rapidly and unpredictably, which can result in gains or losses for users.
Ultimately, whether the pros outweigh the cons will depend on your individual priorities and risk tolerance.
Should I buy UNISWAP crypto (UNI) in 2023?
As with any investment, it's important to do your own research and consider your individual financial situation before deciding whether to buy UNI in 2023.
However, there are a few factors that could make UNI an attractive investment opportunity.
Firstly, the continued growth of the DeFi industry could drive demand for UNI as more users seek to trade cryptocurrencies in a decentralised, trustless environment.
Uniswap is currently one of the most widely used decentralised exchanges and its popularity could continue to drive demand for the UNI token.
In addition, the Uniswap platform is constantly evolving and adding new features, which could increase demand for UNI.
For example, the recent launch of the Uniswap v3 protocol, which introduces concentrated liquidity and other new features, could attract more users to the platform and increase demand for UNI.
Finally, the UNI token has some utility within the Uniswap ecosystem, as outlined in the previous section.
This utility could provide some intrinsic value to the token beyond its potential value as a speculative investment.
Of course, there are also risks to consider when investing in UNI.
The cryptocurrency market is notoriously volatile and the price of UNI could fluctuate wildly in response to market conditions or changes to the Uniswap protocol.
Additionally, there are regulatory and security risks to consider when investing in any cryptocurrency.
What about using the Uniswap DEX in 2023?
In addition to considering whether to buy UNI in 2023, you may also be wondering whether to use the Uniswap DEX for trading other cryptocurrencies.
Again, the decision to use Uniswap will depend on your individual needs and risk tolerance.
One advantage of using Uniswap is that it offers a decentralised, non-custodial trading experience.
This means that you remain in control of your funds at all times, without needing to trust a centralised exchange to hold your assets.
Additionally, Uniswap supports a wide range of cryptocurrency trading pairs, including many newer or less well-known tokens that may not be available on centralised exchanges.
However, there are also risks to consider when using Uniswap.
As with any DEX, there may be higher fees and slippage (the difference between the expected and actual price of a trade) than on centralised exchanges, particularly for larger trades or illiquid trading pairs.
Additionally, there is always the risk of smart contract bugs or other security vulnerabilities, which could result in the loss of your funds.
Ultimately, whether to buy UNISWAP or use the Uniswap DEX in 2023 will depend on your individual preferences and priorities.
If you prioritise decentralisation and control over your funds, and are willing to accept the risks associated with DEX trading, then Uniswap could be a good option for you.
However, if you prioritise lower fees and higher liquidity, then another coin bought via a centralised exchange may be the better fit.
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