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Uniswap and the UNI Cryptocurrency Explained

I have been fascinated by crypto for a long time now, and I enjoy sharing what I have learned about it on ToughNickel.

The Uniswap logo

The Uniswap logo

What Is Uniswap?

The entire point of cryptocurrency is to have control over your own funds and not depend on a centralized organisation like a bank. Ironically, most crypto trading is done on centralized exchanges like Coinbase and Binance. This is why decentralized exchanges—or DEXs in short—that allow their users to buy and sell crypto without a middleman, are being built on smart-contract platforms like Ethereum. Uniswap is the largest and most famous DEX.

Uniswap allows its users to swap Ethereum-based tokens with each other but also to earn interest by providing necessary liquidity. There were other DEXs before Uniswap, but they weren't very efficient. With old DEXs, users would move their crypto to a smart contract that would hold it until someone was willing to exchange their crypto at the offered price, and that could take forever to happen. Uniswap allows almost instant exchanges with the use of liquidity pools.

How Do Liquidity Pools Work?

Uniswap pools its available tokens together into trading pairs. The price of a cryptocurrency on Uniswap is based on the ratio of two cryptocurrencies within their pool and is calculated by an Automated Market Maker (AMM).

For example, there might be an ETH and USDC liquidity pool. The total ETH in the pool has the same value as the total amount of USDC in it. If there are 10 ETH and 10,000 USDC, then 1 ETH would have a value of 1,000 USDC. If someone buys 1 ETH for 1,000 USDC, then there would be 9 ETH and 11 000 USDC in the pool, so 1 ETH would be worth 1,222 USDC. If the value of ETH in that pool becomes too high, that would incentivise Uniswap users to swap their ETH to USDC, so price really just depends on supply and demand like with everything else.

Of course, in reality, there would be millions of both cryptocurrencies in such liquidity pools, so one trade worth a few thousand dollars isn't going to change the price too drastically.

Uniswap depends on provided liquidity, and of course, people don't move their funds into a liquidity pool for nothing. That’s why Uniswap charges a 0.3 % trading fee, which is given to the people that lend their crypto to the pool. This means that you can use Uniswap to earn interest on your crypto holdings.

The Uniswap interface. Its very easy to use.

The Uniswap interface. Its very easy to use.

Using Uniswap is very easy; all you have to do is connect an Ethereum browser wallet, like MetaMask or the Coinbase Wallet, and you can start trading and earning there. If a trading pair doesn't exist, then you can add it and be the first one to add liquidity to it.

The UNI Token

Similar to Aave, Uniswap has its own governance token called UNI. Interestingly, Uniswap was built completely without fundraising, meaning there was no ICO for UNI. In fact, Uniswap originally didn't have a native token.

After the Uniswap code was copied to create other DEXs that distributed their own tokens as incentives to their liquidity providers, the Uniswap developers decided to create UNI to reward their users.

When the UNI token launched, everyone who used Uniswap at any point in the past received 400 UNI as a surprise. As of early July of 2021, 400 UNI were worth $17,988! And if a user had used multiple wallets on the network, they received 400 UNI in every wallet.

The reason why all that UNI was distributed is to let the users engage with the future development of Uniswap because the governance token allows its holders to vote on potential changes in the protocol and serves as a sort of share for Uniswap.

Some liquidity pools also distribute UNI as an additional reward to their providers, but the payout is nowhere near as high as the initial reward for old users. Over the course of four years, a total supply of one billion UNI will be distributed. After that, there will be a yearly inflation of 2%. This inflation will be given to every holder who actively votes on changes of Uniswap in order to incentivise community participation.

UNI price performance from October 2020 to early July 2021

UNI price performance from October 2020 to early July 2021

Is UNI a Good Investment?

If many people use Uniswap to trade, then users could earn more by providing liquidity. The more crypto that gets put into Uniswap, the higher the demand for voting rights for the DEX should become. In other words, the more people use Uniswap, the higher the UNI price should become.

Since there in no point in using cryptocurrencies if users have to depend entirely on centralized exchanges, there may be a growing demand for programs like Uniswap. It's possible that the UNI token could be very lucrative investment in the coming years.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2021 Krypton Currency