Uniswap is the world’s most popular decentralized exchange where anyone can list a token or provide liquidity to the platform without registering or going through extensive identity verification.
This article will cover the value of decentralized exchanges, how Uniswap works, what the Uniswap UNI token is used for, and how much of a lead Uniswap has over the competition.In this article:
Why Decentralized Exchanges are Important
There are a couple of reasons why decentralized exchanges (DEXes) are so important.
1. Listing Coins is Easy
The problem with centralized exchanges (CEXes) is that they’re the gatekeepers of liquidity. I.e., for new crypto projects, traditionally the only way to get trading volume was to get listed on a centralized exchange. However, that wasn’t always so easy.
- A centralized exchange isn’t obligated to list a token. If a CEX decides not to list a project’s token, there is not a lot the project can do about it
- Alternatively, some exchanges have been known to charge massive fees to get a token listed. At one point, Binance was charging hundreds of thousands and even millions of dollars to get a token listed on their platform
Decentralized exchanges solve this problem. Anyone can list a token on Uniswap at any time. There is no fee.
2. Decentralized Exchanges are More Difficult to Shut Down
We’ve recently seen lawmakers go after BitMEX and presumably, this won’t be the last exchange that regulators try to shut down. When an exchange has an office and acts like a regular business, it is vulnerable to regulation.
Decentralized exchanges are more difficult to target. While there is a Uniswap team, even if they were all arrested, someone could just fork Uniswap and traders could move to the new platform.
Some will make the argument that decentralized exchanges can never be shut down by any government.
Honestly, we don’t know yet. We won’t know how resilient a DEX is until a government really goes after one. That will probably happen in the next few years and it will be interesting to see what happens.
3. Anyone Can Trade on a DEX
DEXes are great because anyone can trade on them; there is no KYC. At least, on a true DEX there is no KYC. Some platforms claim to be decentralized even though they have KYC. Any “decentralized” exchange which has KYC is not really a DEX at all.
One of the most significant opportunities that will come from crypto is giving everyone access to traditional financial tools. The 1.7 billion people around the world who don’t have access to the banking system will benefit immensely.
The Uniswap Protocol
Uniswap is Ethereum’s most popular DEX. There are more than 500 trading pairs currently listed on Uniswap, although only about 50 of these trading pairs are doing more than $500,000 per day in volume.
One of the first things that you notice when looking at the Uniswap platform is that coins don’t trade against ETH, they trade against WETH. We’ve written an article explaining wrapped Bitcoin and how it can be used in the DeFi ecosystem.
WETH is like WBTC, it’s Ethereum that has been “wrapped” in a smart contract to turn it into an ERC20 token. Uniswap, along with dozens of other protocols in the DeFi ecosystem, is designed to work with an ERC20 token.
It’s simpler to turn ETH into WETH than it is to build a protocol to work with both ERC20 tokens and Ethereum. Anyone holding WETH can easily convert it into ETH at any time.
How Uniwap Gets Liquidity
A centralized exchange like Coinbase matches a buyer with a seller and that’s how liquidity is added to the platform. Uniswap is different. On Uniswap a person known as a “liquidity provider” deposits an equal amount of two coins onto the platform. For example, $50 worth of DAI and $50 worth of WETH.
These coins are added to the DAI/WETH liquidity pool and the liquidity provider is given a trading fee reward in proportion to how many coins that they’ve deposited. The liquidity provider can withdraw their coins at any time. A full guide to becoming a liquidity provider is available here.
Currently there is $3 billion deposited in Uniswap by liquidity providers. That’s pretty incredible considering that in May of 2020 there was less than $25 million locked up. This is exponential growth!
Uniswap trade volume is also spiking as the decentralized exchange has been routinely doing more than $100 million in trading volume per day. What’s really staggering is that Uniswap is now handling more daily trading volume than Coinbase, one of the most popular centralized exchanges in the world.
Again, this represents exponential growth as Uniswap was doing between $8 to $15 million in daily volume just a few months ago in June of 2020.
The UNI Coin
Recently Uniswap airdropped their UNI token to all of the Ethereum addresses that have previously used the platform before September 1st. The airdrop awarded users 400 UNI tokens. Given that UNI was trading at about $3 per coin at the time, this represented an astounding $1,200 airdrop.
The UNI token is designed to let holders participate in the governance of the Uniswap protocol. The more UNI that someone holds, the more weight they have to vote for or against proposals that will affect the Uniswap protocol.
For example, the first community proposal that UNI token holders can vote on is to lower the threshold for who can propose a change to the protocol. Currently, only someone who is holding about $35 million worth of UNI can propose a change to the protocol. Lowering the threshold would make it easier for people holding less UNI to propose a change.
An in-depth overview of the UNI token and how it can be used to govern the Uniswap protocol is available here.
The Uniswap Advantage
Uniswap is the most successful decentralized exchange the world has ever seen. Not that the world has really seen it… Walk up to any random person on the street and ask, “what is a DEX?”
They’ll look at you like you’re selling a bridge to Hawaii.
However, this fascinating technology isn’t going away. In the next decade, there will be tens of millions of people who are going to learn about DEXes and how they work.
Uniswap has the first-mover advantage, and so far it looks like they’re the most likely winner in the battle for trading volume. Will Uniswap maintain that advantage in the long term? Only time can tell, however, the platform is well run and their continued success appears likely.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.