August 24, 2023
6 min read
UNI is an ERC-20 token on the Ethereum blockchain that offers control over the Uniswap protocol’s governance.
Uniswap is an automated market maker (AMM) platform and decentralized exchange (DEX), built on the Ethereum network, which offers a non-custodial trade of ERC-20 tokens. Below we explain what a DEX and an AMM are. The first version (Uniswap v1) was released in November 2018, and the second (Uniswap v2) was released in May 2020.
Uniswap v1 only accepts ERC-20 token exchange. Uniswap v2 allows many groups like USDC / BUSD, DAI / KNC, or DAI / ETH. The aggregation of unique pairings can lead to fewer “trade-offs” from a user’s perspective, ultimately improving price execution by reducing gas commissions, liquidity fees, and slippage.
Uniswap v2 also includes a protocol change, allowing UNI token holders to charge 0.05% of the exchange fee versus 0.25% for liquidity providers and a new pricing oracle logic, flash exchanges, and a change in the contract architecture.
This post briefly explains how the UNI token works and its usefulness in the DeFi ecosystem.
UNI was born from the need for Uniswap to provide its users the possibility of earning tokens by injecting liquidity into the protocol.
On September 16, 2020, the launch was made through an airdrop to Uniswap users who had interacted with the platform before September 1, either through swapping tokens or providing liquidity.
The first use case of the UNI token is that it is used as a governance token. This allows all UNI holders to vote on key issues that can have a serious impact on the direction Uniswap takes, which will surely impact the token price. Also, the management of the treasury will be in charge of the community.
The UNI token also provides liquidity on Uniswap, as liquidity providers (LPs) can provide their UNI along with an equivalent amount of ETH.
Uniswap showed a marked growth after the launch of the second version of its protocol, where UNI is created with a genesis issuance of 1 billion tokens that will be distributed over four years. 40% goes to investors and advisers and the team members themselves. The remaining 60% goes to members of the project community. After that, the project will see an inflation rate of 2% per year. All users who had used any Uniswap service before September 1, 2020, received 400 UNIs worth about $ 4.25, a total of about $ 1,700. Today’s market price for a UNI is $ 4.88.
The Uniswap project starts after a series of posts made by Vitalik Buterin, founder of Ethereum, especially on his Reddit account, in the years 2017/18. He suggested creating a DEX on Ethereum and spoke of something unknown until then, which were the automated market makers, AMM.
These ideas were collected by Hayden Adams to create Uniswap and transform it into what is today, one of Ethereum’s largest DeFi ecosystems. Hayden Adams is an expert in simulation and design in the automotive and aerospace industries. You can see his LinkedIn profile at this link.
UniSwap uses an algorithm that automatically assigns the applicable exchange rate based on the relationship between tokens and exchange demand.
Let’s define some basic concepts.
• What is a DEX? A DEX is a decentralized exchange. The difference with a centralized exchange is that, in a DEX, the swap operation is carried out in a decentralized way through smart contracts, without a centralizing entity to guarantee the operation. The custody of the coins is the responsibility of the owner.
• What is an AMM? In traditional markets, there is the figure of the “market maker,” which is a person or entity that injects money into a market to activate it. Most often, it is a bank or financial institution. An AMM represents this figure but in a decentralized way. Uniswap’s AMM works under an original design called CPMM, Constant Product Market Maker. A user can deposit his/her cryptos in a pool through a pair, for example, DAI / ETH, and that money can be used by another user to make another trade. In return, the liquidity provider receives part of the transaction fees in proportion to the money contributed. This was the basis for Uniswap’s spectacular growth, giving rise to the phenomenon known as liquidity mining. The formula is very simple x * y = k, where “x” and “y” are the deposited amounts of the pair of cryptocurrencies, and “k” is a constant.
• What is a liquidity pool? It is a reserve of funds created by the deposits of contributors who seek profitability for their cryptocurrencies. The objective of Uniswap is to obtain liquidity from some users so that others carry out their operations without depending on anyone. Uniswap design allows users to create pools of liquidity with which traders can quickly trade. A user can deposit his/her cryptocurrencies in a liquidity pool (e.g., DAI / ETH), and that money is used by other people who want to make exchanges. In return, depositors receive part of the transaction fees depending on the amount they have deposited.
This particular operation led Uniswap to reach incredible volumes since this injection of liquidity means more profits for users, giving rise to a very fashionable phenomenon at the moment: liquidity mining. In this way, a win-win is generated: traders experience better transactions, and depositors in pools take commissions for providing liquidity.
These pools are configured so that the depositor must enter two tokens (e.g., ETH and DAI). The purpose of this is to create a balanced and balanced liquidity system that allows the creation of interesting exchange options for the platform’s users.
Thus, if liquidity providers open a DAI / ETH pool, they must deposit value in both DAI and ETH. Once the pool is created, it will be listed so that users can exchange that pair.
– It is decentralized.
– Any ERC-20 token can be exchanged.
– It is open source.
– Trading is relatively inexpensive.
– Liquidity pools offer good returns for depositors.
Like most DeFi initiatives, the protocol is in an experimental phase, so the risk is high.
– Ethereum’s scalability problems make the price of gas very high.
– The UNI token is distributed and traded as security. This could serve as an argument for possible intervention by the United States Securities and Exchange Commission (SEC).
– It is possible to list fake tokens. You need to be very alert.
The advent of government tokens has incentivized members across the cryptocurrency industry to educate themselves and pushed the concept of DEX as a whole. In monetary terms, they are also why the crypto industry has gone from $ 1 billion total locked value (TLV) in DeFi at the end of 2019 to well over $ 13.5 billion at the end of 2020.
Uniswap was very timely in launching its UNI government token because DeFi faces many challenges. DeFi is the most competitive industry on the planet. Ethereum is enduring great pressure caused by network congestion, and the current price of gas is unbearable. If Ethereum 2.0 doesn’t show quick results, the industry will surely be looking for new blockchains to trade on.
That is why the community’s vote is very necessary since the interested parties themselves will seek the best solution for their money.
The introduction of the UNI token and the massive airdrop, in a way, was expected by the market. This new asset allows the platform to have an internal governance mechanism. Something like a loyalty program mixed with company shares: Uniswap users receive rewards for contributing to the platform, as well as a vote on how the protocol is executed.
Uniswap grew a lot as a decentralized exchange (DEX) after the launch of the second version of this protocol v2, where UNI is created with a genesis issuance of 1 billion tokens distributed over four years. UNI hodlers can submit a governance proposal in the initial stages of governance, delegating 1% of the total UNI supply, i.e., 10,000,000 UNI tokens.
The first use case of the UNI token is that it is used as a governance token. This allows all UNI holders to vote on key issues that can have a serious impact on the direction Uniswap takes, which can ultimately have a huge impact on price action (PA). The treasury will be managed by the community, which is very good news for UNI holders.
The UNI token also provides liquidity on Uniswap, as liquidity providers can provide their UNI along with an equivalent amount of ETH to take a portion of all fees paid when a user buys or sells tokens.
Several analysts consider that UNI’s launch by Uniswap is a direct response to its recent competitor SushiSwap. This protocol copied Uniswap and took a lot of activity out of it. Uniswap and SushiSwap have the fourth and fifth-highest value blocked in their protocols, respectively.
As a note of color, following the airdrop, Uniswap and UNI moved $ 650,000 in gas rates in just three hours. The Ethereum network went berserk, and fees soared. Ethereum miners had a new record for combined revenue.
The recent announcement of the imminent release of UniSwap v3 also caused great anticipation. Uniswap v3 is an update that has been rumored for a long time.
Uniswap announced in August an $ 11 million Series A round led by Andreessen Horowitz with additional investments from USV, Paradigm, Variation A single, Variant, Parafi Cash, SV Angel, and A.Funds. The premise of the Series A round was to provide the team with the resources to “grow and build Uniswap V3, which will greatly increase the flexibility and efficiency of the protocol capital.”
While there have been no official announcements of the update, various members of the Ethereum community have been creating quite a stir on Twitter lately by posting analysis of what is about to happen.
In the founder’s words, this new version will focus on the lag and efficiency issues currently facing Uniswap v2 users.
No specific details have been released on how this will be achieved. Still, the Uniswap founder mentioned dynamic trading fees, the ability to create trading pairs without the participation of both sides of the market, and extremely low slippage levels.
The development team also intends to make Uniswap easier to use by including its educational content.
For the ultimate source of information, visit: Uniswap’s Official Website
Follow @UniswapProtocol on Twitter to keep up with the latest updates.
Join UniSwap’s subreddit r/UniSwap to discuss the currency with the rest of the community.
7. How to store and manage UNI
You can manage and exchange UNI anonymously and securely in Atomic Wallet.
Uniswap is undoubtedly one of the most important decentralized Ethereum applications. A decentralized exchange powered by an automated market-making system has quickly become the largest consumer of gas on the blockchain. Uniswap regularly processes more than 100,000 transactions with a volume of hundreds of millions each day.
UniSwap has proven to be one of the flagship products in an ultra-competitive environment such as DeFi. I believe that the team will continue to develop new solutions on an ongoing basis. The v3 update is already on the way. Number One Hayden Adams has stated that the new v3 version “will eat UniSwap v2’s lunch”. I think UniSwap is going to remain at the forefront of the DEX race for a long time.
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