Uniswap UNI

About Uniswap

Most cryptocurrency today is bought and sold on centralised exchanges. These are places where traders can exchange currency via an intermediary system, run by the company operating the exchange.

Decentralised exchanges (or DEXes) offer an alternative that does away with middlemen and third parties. This makes traders extremely resistant to attempts at censorship, because there are fewer parties vulnerable to coercion. While there are a number of technical obstacles which make DEXes more difficult to implement than their centralised counterparts, these are steadily being overcome.

Among the leading names in this new movement is Uniswap. It’s built on the Ethereum protocol, and doesn’t require any helping hands from central authorities and exchanges, nor does it use a traditional order book, (a list of open buy and sell orders for a given asset, like Bitcoin).

The decentralised nature of Uniswap means that it does away with the fees charge by profit-driven exchanges, and eliminates the danger of the private key being compromised when a given exchange is hacked.

• Uniswap is the creation of Hayden Adams, a Siemens engineer.
• It came to be on November 2^nd, 2018.
• Unlike private exchanges, Uniswap does not require registration. It it thus geared toward anonymity.
• Uniswap is aligned with ERC-20 standard requirements.
• Since it is based on the Ethereum blockchain, there is no ‘halving’. Uniswap can only be mined.

A brief history of Uniswap

The platform came to be in 2018, as an extension of the Ethereum blockchain. It’s therefore compatible with most of the machinery that Ethereum relies on, like ERC-20 tokens. The idea actually had its roots in an idea first proposed in 2016 by Vitalik Buterin, one of the co-founders of Ethereum.

The second version of the protocol, v2, was announced in May 2020. It introduced ERC20/ERC20 liquidity pools, which meant that users would not have to supply ETH and thereby expose themselves to losses. As a consequence of the decentralised nature of Uniswap, there was no way of stopping the first version of the platform from persisting long after the rollout of the second version.

The latest version of the exchange, v3, introduces a number of new features, designed to bolster capital efficiency and to allow LP positions to be represented by non-fungible tokens (NFTs). There are also set to be changes designed to counteract the rising costs of Ethereum transactions, which have priced many smaller traders out of the market. This should lead to much greater adoption following rollout.

How does Uniswap work?

Uniswap works using something called an Automated Liquidity Protocol. This uses devices called Automated Market Makers, which are smart contracts designed to keep hold of pools of liquidity which traders can use to swap.

Liquidity is a major problem for traditional exchanges. It refers, in practice, to the quantity of orders waiting in the book. If there aren’t enough orders waiting, then incoming orders cannot be fulfilled. Busy markets offer a lot of liquidity; there’s always someone looking to buy or sell what you’re trading in; but quieter (or ‘narrow’) markets run into trouble — you might spend time waiting for a new order to be fulfilled.

The Automated Liquidity Protocol incentivises traders to provide liquidity to other traders. By pooling resources together, everyone can have enough liquity to execute every trade. This allows traders to complete trades instantaneously using this pool of excess liquidity.

In reality, we’re actually talking about two pools: one for the selling currency, and one for the buying currency. Let’s say that a trader wants to buy a single ETH for $3400. They might take the ETH out of one pile, and deposit $3400 into another. The ratio between the pile would therefore shift. This, in turn, would change the price at which future buyers and sellers would be able to trade: the supply of ETH would go down, causing the price to rise, thereby incentivising bitcoin owners to sell. Through this mechanism, stability might be arrived at.

Of course, if you’re placing a huge order then the balance between the two commodities would shift dramatically. Consequently, you can expect the price to scale exponentially depending on the size of the trade relative to the amount of available liquidity.

The role of arbitrage

In order to achieve price stability, Uniswap relies on arbitrage traders. These are actors who look for price discrepancies and try to even them out. So, they might notice that one exchange is selling bitcoin for a higher price than another, and move quickly to buy on the latter before selling on the former for a quick profit.

The effect of these traders is to bring the Uniswap ecosystem in line with the outside world. Where imbalances exist, they are corrected for a profit, benefiting the trader directly, and the Uniswap system as a whole.

What about the token?

The uniswap token itself is a governance token. It was created in October 2020 as a means of counteracting a fork in the platform to SushiSwap. Sushiswap had begun to lure over Uniswap users by providing them with decisionmaking powers, and allowing them to vote on prospective changes to the Sushiswap platform. The more SUSHI tokens you had, the more power you have over the platform.

In response, Uniswap created a billion UNI tokens, of which 150 million were distributed to the platform’s users. This meant, in practice that everyone who had ever used the platform was given four-hundred tokens, which amounted to $1,000 (closer to $12,000 today). This is a practice known as an ‘airdrop’, whose objective is to raise money for a new currency, and to bolster the price.

Uniswap Price Prediction

It is difficult to make concrete predictions about the future of crypto in general, and Uniswap is no exception. What follows is therefore speculatory, and it is incumbent upon individual traders to research any investments, and to accept the risk that the UNI price might collapse. You might lose everything, so don’t bet more than you can afford to lose!

Some optimistic predictions see Uniswap continuing to rise in value throughout 2021, potentially touching $80 before year’s end. At some point, we will doubtless see a collection, and a slump in the value of crypto in general; but in the long term, bullish sentiments abound. It’s conceivable that Uniswap's price might reach the $300 mark within five years.