Uniswap, a fully decentralized protocol for automated liquidity provision on Ethereum has brought notable changes to cryptocurrency trading and investing. These changes have caught the attention of many in the crypto sphere. What are the unique features of this revolutionary cryptocurrency exchange which have afforded it this attention?
The Uniswap decentralized protocol was made by Hayden Adams, who reportedly got the inspiration from a post by Ethereum founder Vitalik Buterin.
The decentralized protocol is built on Ethereum for trading ERC20 tokens. This decentralized cryptocurrency exchange is designed to function as a tool for the community to trade tokens without centralized platform fees or middlemen, which is unlike most exchanges.
Besides, the system uses a math equation, pools of tokens, and ETH to determine prices and execute trades. This is distinct from the regular exchanges that match buyers and sellers.
A major difference between Uniswap and other decentralized exchanges is the use of a pricing mechanism called the “Constant Product Market Maker Model.” This system provides a means to keep a token’s value balanced relative to the token pair in question.
Uniswap exchange infrastructure
Uniswap exchange infrastructure has unique features that stand out from its competitors.
- It’s a public, open-source, non-profit project with the intention of benefiting the Ethereum ecosystem.
- The project is 100% on-chain. They totally rely on the Ethereum blockchain when operating. Therefore, interested parties can use the features with web3 and embed Uniswap functionalities within their apps as desired.
- Uniswap makes use of two types of smart contracts; Factory contract and Exchange contract. The Factory smart contract contains an exchange registry and a method to deploy an Exchange contract for a particular ERC20 token. An exchange can be created for any valid ERC20 token.
- When compared to decentralized exchanges like EtherDelta, Bancor, Radar Relay (0x), IDEX, and Airswap, Uniswap offers cheap gas prices.
- The decentralized exchange supports ERC20 to ETH, ETH to ERC20, and ERC20 to ERC20 token swaps. Users also get the opportunity to perform token swaps and then send the resulting tokens to another Ethereum address, all at once. This is useful when exchanging tokens for someone, or diversifying holdings to multiple ETH addresses.
Uniswap liquidity pool
Uniswap utilizes liquidity pools for liquidity solutions. The pool is open to all and gives rewards for liquidity supplied. These liquidity providers play a crucial role in the system, as liquidity is needed for the exchange to function.
Users get the opportunity to add (deposit) and remove (withdraw) liquidity from each ERC20 Exchange contract at any time. That being said, withdrawals from a liquidity pool burn the liquidity tokens associated with that share.
Notably, after a token is deposited into a liquidity pool, Uniswap’s own liquidity token is created, the amount is based on the pool share. These tokens are used to record the share of a pool. Users are also able to exchange their liquidity tokens to transfer share ownership, without disturbing the actual pool funds.
The liquidity added to an ERC20 also requires an equivalent value of ETH to be deposited. For instance, 50% value ETH for 50% value ERC20.
Arbitrage trades: Uniswap and centralized exchanges
Uniswap isn’t replacing centralized exchanges. In fact it is relying on exchanges which use order books.
In a case where a Uniswap exchange is not balanced, there is a need to put a means for the value to be balanced. This brings arbitrage traders into the picture. They will have to leverage alternative exchange rates from other services to fulfill the arbitrage.
This ultimately shows that Uniswap is not a replacement for traditional exchange models. But it can be seen as a new model of token swapping.
Uniswap V2: upgraded and enhanced protocol
With the aim of improving the system, Uniswap launched its second iteration on the Ethereum Mainnet on May 19, 2020. The protocol has been utilized on the Mainnet for about 2 months, and no major breakages or issues were found relating to the integrity of the smart contracts.
As a matter of fact, Uniswap V2 has some upgrades and enhancements that improved the swapping and liquidity mechanisms of the first iteration. These changes which have further distuinguised the decentralized cryptocurrency exchange are:
- The elimination of ETH as an intermediary for ERC20 to ERC20 token swaps. This upgrade cuts the transaction count in half and saves gas fees.
- The price oracle function now permits time-weighted average pricing, which is based on token pair prices from each block.
- Flash swapping, which makes it possible to borrow tokens from a Uniswap pool. Also, one can make some arbitrary transaction with external services and pay back the originally borrowed funds, all in one transaction.
- Addition of non-standard ERC20 tokens. This has enhanced Uniswap’s proposition to be the leading on-chain exchange when it comes to usage.
Uniswap growth and achievements
The growth and development carried out by Uniswap in their system have also led to other results.
According to last week’s records, Uniswap’s August trading volume exceeded $1.76 billion. This outperformed July’s record high with about two weeks to go in August.
Besides, the present monthly volume is also the fourth successive record high for the platform.
The increase in transaction volume shows that Uniswap is growing and challenging other Ethereum-based DEXes like IDEX and EtherDelta for market dominance.
Overall, Uniswap is a good choice for privacy-focused users seeking an efficient decentralized trading experience. Uniswap’s decentralized cryptocurrency exchange has been one of the major players if not the most major player fueling the recent DeFi (decentralized finance) boom.
Previously, Trace Labs’ Network Operating System (nOS) integrated Uniswap v2 as its Liquidity Provisioning System (LPS).
That was a great read. A lot of good information. I would have added some of the negatives of the protocol, like failed transactions, which resulted in loss of eth gas and completion rates of transactions versus failed transactions. I have about about 50/50 chance rate when I use it.