What is Uniswap (UNI)? A complete Beginners Guide

Have you heard of Uniswap but are not quite sure what it is or how it works? Are you, perhaps,  curious about how decentralized finance is changing the way we trade? Well, in this article, we’ll take a deep dive into the world of Uniswap, the revolutionary decentralized exchange built on the Ethereum blockchain. From what it is, how it works its unique features to its impact on the crypto market, we’ll cover it all. Ready? Let’s explore the exciting world of Uniswap.

What is Uniswap (UNI)?

Uniswap is a decentralised exchange, created by Hayden Adams and currently hosted on the Ethereum blockchain. Uniswap or UNI also refers to a third-generation cryptocurrency and the native digital currency for the Uniswap DEX. The exchange started in November 2018 and it was not until September 2020 that they launched a token for the platform.

It started off as an idea floated by Ethereum co-founder Vitalik Buterin in a blog post that explained how liquidity challenges within the DeFi ecosystem could be solved through an Automated Market Maker (AMM) model. Hayden Adams, a blockchain engineer at Ethereum took up the challenge and launched a DEX that utilizes the AMM liquidity model – in the name of Uniswap.

Vitalik Buterin and Ethereum were among the earliest donors that contributed to the creation and launch of Uniswap. And his association with the DEX has gone a long way in giving it credence and drawing in investors and traders. Today, Uniswap is the sixth-largest DeFi protocol (according to DeFi pulse) with more than $5 billion in crypto assets currently locked on the DEX.

For close to two years, Uniswap enjoyed unrivalled dominance of the DeFi ecosystem as the undisputed AMM exchange leader. But in the last quarter of 2020, SushiSwap another DEX that uses AMM liquidity emerged and went to launch a token for the trading protocol. And its emergence is believed to have played a key role in Uniswap’s launch of its own native token less than a month later.

Today, the UNI token ranks highly among the fastest-growing tokens. In less than nine months it had moved from a new token to a feature on CoinMarketCap’s list of the top 10 largest cryptocurrencies with a market cap of $10+ Billion.

How is Uniswap Created?

Uniswap uses a unique liquidity provision mechanism, called Automated Market Maker (AMM) model, to facilitate trades. Instead of relying on order books like traditional centralized exchanges, Uniswap uses smart contracts to automatically match buyers and sellers. Smart contracts are also responsible for creating and maintaining the liquidity pools needed for trading.

Users can provide liquidity to Uniswap by depositing an equal value of two different tokens into a liquidity pool. They are then rewarded with a share of the trading fees generated by the pool. This incentivizes users to provide liquidity to the platform, making it more liquid and allowing for more efficient trading.

What is the Purpose of Uniswap?

The main purpose of Uniswap is to provide a decentralized and trustless platform for the exchange of Ethereum-based tokens. It allows users to trade these tokens without the need for a centralized intermediary. Users, therefore, have full control over their funds and private keys at all times, making the platform more secure and resistant to censorship.

Uniswap also allows crypto enthusiasts to create a market for any ERC20 token, which means users can trade tokens that may not be listed on traditional centralized exchanges. This opens up a wider range of trading options and opportunities for users.

Additionally, Uniswap’s unique liquidity provision mechanism, the Automated Market Maker (AMM) model, allows for more efficient trading by providing liquidity on-chain. This eliminates the need for order books and allows for near-instant trades, which can save time and reduce the risk of slippage.

How Does Uniswap Work?

In addition to trading, Uniswap also allows users to provide liquidity to the platform by depositing an equal value of two different tokens into a liquidity pool. They are then rewarded with a share of the trading fees generated by the pool. This incentivizes users to provide liquidity to the platform, making it more liquid and allowing for more efficient trading.

Uniswap also has a built-in mechanism to adjust the token exchange rate to maintain a balance between the two tokens in the liquidity pool, this is called the “constant product market maker” mechanism. This means that if the price of one of the tokens changes, the other token will be adjusted accordingly to maintain the balance in the liquidity pool.

How to Mine Uniswap

You cannot exactly mine Uniswap. It is a decentralized exchange built on the Ethereum blockchain, which uses a proof-of-stake (PoS) consensus mechanism. Unlike proof-of-work (PoW) consensus mechanisms, such as the one used by Bitcoin, which require miners to solve complex mathematical problems to validate transactions, PoS consensus allows users to validate transactions by holding and staking their own Ethereum.

As Uniswap is a decentralized exchange, it does not require mining to validate transactions or add new blocks to the blockchain. Instead, transactions are validated by the Ethereum network, and new blocks are added by Ethereum validators, who are rewarded with Ether for their work.

However, as we’ve already mentioned, Uniswap incentivizes users to provide liquidity to the platform by depositing an equal value of two different tokens into a liquidity pool, and in return, they are rewarded with a share of the trading fees generated by the pool. This process is often referred to as liquidity provision, and it is different from mining.

How to Buy Uniswap

To buy UNI, you’ll need to set up a wallet that supports ERC20 tokens. Then, buy Ethereum (ETH) which is required to buy UNI on a centralized or decentralized exchange, or through a peer-to-peer marketplace. Next, connect your wallet to Uniswap or another decentralized exchange that is listing UNI. Then select the UNI token and execute the trade by providing the required amount of Ethereum for the amount of UNI you want to purchase. Finally, confirm the trade by signing the transaction in your wallet, and the UNI tokens will be sent to your wallet.

How Is Uniswap Used?

Uniswap is primarily used as a decentralized exchange (DEX) to facilitate the trading of Ethereum-based tokens. Users can connect their wallets to the Uniswap platform and trade any ERC20 token that is listed on the platform. This can be done by providing liquidity to the platform, which is done by depositing an equal value of two different tokens into a liquidity pool. Once the liquidity is provided, users can execute trades by selecting the “swap” button and the platform will automatically match them with a seller and execute the trade at the current exchange rate.

Uniswap’s unique liquidity provision mechanism, the Automated Market Maker (AMM) model, allows for more efficient trading by providing liquidity on-chain. This eliminates the need for order books and allows for near-instant trades, which can save time and reduce the risk of slippage.

In addition to trading, Uniswap can also be used to create markets for any ERC20 token, which means that users can trade tokens that may not be listed on traditional centralized exchanges. This opens up a wider range of trading options and opportunities for users.

Furthermore, Uniswap can also be used as a liquidity provider, by depositing an equal value of two different tokens into a liquidity pool and getting rewarded with a share of the trading fees generated by the pool. This incentivizes users to provide liquidity to the platform, making it more liquid and allowing for more efficient trading.

Conclusion

Uniswap is a revolutionary decentralized exchange that has changed the way we trade. Its unique liquidity provision mechanism, the Automated Market Maker (AMM) model, allows for more efficient trading by providing liquidity on-chain. This, along with its ability to allow anyone to create a market for any ERC20 token, has opened up a wider range of trading options and opportunities for users. If you’re new to the world of decentralized finance, now is the time to explore Uniswap and see how it can benefit you.