What is Uniswap & Should I Buy It?
Launched in November 2018, Uniswap is an automated, decentralised cryptocurrency exchange where digital tokens can be swapped.
It is an example of a Decentralised Finance (DeFi) system where users can exchange tokens without requiring a middleman to complete the transaction.
To try and counter liquidity issues of similar decentralised exchanges, Uniswap uses liquidity pools to determine asset pricing and to match buyers and sellers. Uniswap was initially designed not to charge transaction fees.
In September 2020 Uniswap launched its own Uni cryptocurrency to act as a governance token on its exchange. Most ERC-20 tokens can be listed on this Ethereum based exchange.
How Does Uniswap Works?
Uniswap is based on Ethereum blockchain technology. A user will require an Ethereum based digital wallet before connecting to Uniswap and exchanging tokens with another user.
The Uni currency was introduced as a governing pool token. Users of Uniswap can use the platform to exchange digital tokens or add to the liquidity pools.
When tokens are added to a liquidity pool the contributor receives pool tokens in compensation, which are then burned once the original funds are returned.
Owners of Uni digital currency have a say on the future of the protocol going forward. When it was launched anyone who had used Uniswap prior to 1st September 2020 was issued with 400 Uni tokens.
This represented 15% of the total mint on launch of 1 billion Uni. Uniswap planned to allocate 40% of their Uni tokens within the first year, before distributing a further 10% each subsequent year until all the minted tokens were allocated.
Uni tokens are available on the Uniswap exchange and once they are in an Ethereum based digital wallet they can be used to add to a liquidity pool or used to swap with any of the choice of available digital tokens.
Users of the platform can swap digital tokens and add funds to liquidity pools. Within a liquidity pool every Uni pool token represents the share of the pool’s assets and are generated, or ‘mined’, whenever funds are added to the pool.
These Uni tokens can be traded for other tokens or even moved to other exchanges, but once the initial funds are withdrawn the pool tokens are burned, removing them from the exchange.
Any user can be involved in these liquidity pools, and it is the pools which mean the platform does not require an order book, bypassing the need for a middleman to process transactions.
A further bonus for liquidity providers is receiving part of a transaction fee when a swap of a trading pair of tokens is complete, the share being based on the number of pool tokens possessed.
What Are the Use Cases for Uniswap & UNI Tokens?
Uniswap has already become one of the most relevant decentralised cryptocurrency exchange platforms on the market. In essence it is not a cryptocurrency exchange as such, more a platform to swap digital currency tokens.
Uniswap introduced the Uni cryptocurrency which has two primary use cases. The first is in relation to the governance of the Uniswap platform. Those users who hold Uni tokens will have a say in how Uniswap moves forward.
Holding Uni provides voting opportunities to determine the platform’s development.
The second use case for Uni is adding liquidity to Uniswap. When Uni was launched four specific mining pools were introduced which compensate providers of liquidity with UNI tokens.
The quantity will be based on a user’s share of the pool’s overall liquidity. Uniswap allocated 5 million Uni to each pool for ‘mining’ based on liquidity provided by the user.