Uniswap is a decentralized crypto exchange. In recent years, markets have witnessed the rise of what is called decentralized finance (DeFi). This is the base for digital currencies, which have gained much popularity recently. Unlike centralized finance, the premise of DeFi is that governmental institutions do not control the supply of the currency based on it (such as cryptocurrencies).
Bitcoin specifically has become popular and skyrocketed in price accordingly, going from under $5 to over $50,000 in just a few years. Despite this, decentralized finance faces criticism, such as the claim that exchanges are centralized, which defeats the purpose of DeFi to begin with. Luckily there are solutions like Uniswap that are making the dream of actual decentralization closer to reality.
What is Uniswap?
Uniswap is an open-source protocol for providing liquidity and trading ERC20 tokens of the Ethereum network. It was developed by Uniswap Labs as a decentralized protocol that allows users to build, swap, and make a profit from tokens. The organization behind it claims that it has hosted over $700 billion in trading volume and over 82 million trades so far. In a way, it is a community where developers, liquidity providers, and traders can collaborate to achieve their objectives.
The best way to understand Uniswap is to view it as an automated market maker that eliminates the need for middlemen. This level of decentralization offers many benefits.
Peer to peer trading means true decentralization
Uniswap enables peer-to-peer trading by making liquidity pools that match supply with demand. Each liquidity pool includes a couple of cryptocurrencies, and whenever someone makes a trade, the currency is pulled from that pool. Traders can connect their wallets to the platform to execute transactions. Smart contracts are used when trading cryptocurrencies through the exchange. Also, even though it is decentralized, the transactions are not free of charge and they involve a fee called a gas fee.
Earning money on Uniswap
Users can earn money on the exchange by lending it money – sort of like interest from a loan. If they, for example, contribute to the Bitcoin/Ethereum pool (by lending both Ethereum and Bitcoin), they earn a percentage of the gas fee whenever a trader uses the liquidity pool they contributed to. The gas fee is usually in Ethereum.
The Uniswap token
Uniswap has issued a token called UNI to reward community members and others for their work and to help with governance. You can trade Uniswap against another cryptocurrency on the Uniswap exchange or on another exchange. You can also trade the price of UNI against the dollar and manage volatility when trading with a licensed broker. By buying it against the US dollar you won’t need to buy another cryptocurrency first. Thus, you don’t need to pay a double fee for two transactions.
You can trade tokens with a CFD broker
The UNI has been moving in a downtrend recently, but in the long term, it might change direction, especially if decentralized finance turns out to be as efficient as experts promise it would be.
Although Uniswap is promising, both as an exchange and as a token, it still has many challenges to face. It has recently faced investigation and it has many competitors that it must outperform. Moreover, it needs to make the speed of execution faster, which in turn relies on the speed of the blockchain it is built on. So far it is doing well, but how much further it will develop remains to be seen.