Uniswap v3

Based in: Decentralized
Founded: 2018
URL: https://uniswap.org
Rating: 8/10

Uniswap is generally considered trustworthy with some caveats.

Key Facts

Uniswap is one of the most popular decentralized exchanges (DEXs) in the cryptocurrency space, operating on the Ethereum blockchain. Launched in November 2018 by Hayden Adams, Uniswap revolutionized the way people trade cryptocurrencies by utilizing an innovative automated market maker (AMM) model, rather than relying on traditional order books used by centralized exchanges. This AMM model allows users to trade directly from their wallets, providing greater liquidity and enabling the trading of a wide variety of tokens without the need for an intermediary.

At its core, Uniswap allows users to swap ERC-20 tokens directly from their wallets using smart contracts, without needing to rely on a third-party exchange. The platform is open-source, which means anyone can participate in the ecosystem by adding liquidity to its pools or creating new tokens for trading. Uniswap’s decentralized nature also ensures that users retain control over their funds at all times. This is in stark contrast to centralized exchanges where users must deposit their funds into the exchange's wallet and trust the platform to secure their assets.

Uniswap’s key innovation is its liquidity pool model. Unlike traditional exchanges that rely on buyers and sellers to match orders, Uniswap allows users to provide liquidity to the platform by depositing tokens into liquidity pools. These pools are made up of two tokens, and liquidity providers (LPs) earn fees based on the trading volume of the pool they contribute to. In return for supplying liquidity, LPs are incentivized with a share of the transaction fees generated by trades within the pool. These fees are typically set at 0.3% per trade, which is then distributed to the liquidity providers proportionally based on their contribution to the pool.

The liquidity pool model on Uniswap enables users to trade any ERC-20 token without the need for a traditional order book system. This creates a permissionless environment, where anyone can list a token on the platform, without the need for approval from a centralized authority. As a result, Uniswap has become the go-to platform for decentralized finance (DeFi) applications, enabling trading in a wide variety of tokens, including new or lesser-known assets that may not be available on centralized exchanges.

Uniswap’s AMM protocol also offers the benefit of low slippage, even with lower liquidity, thanks to the use of a constant product formula. The formula ensures that the ratio of tokens in the liquidity pool remains constant, which helps to maintain price stability. However, this is most effective in larger pools, and as liquidity decreases, there may still be potential for slippage, particularly with smaller or less liquid tokens. Nevertheless, Uniswap’s ability to maintain liquidity across a vast array of ERC-20 tokens has contributed to its popularity in the decentralized exchange space.

Uniswap’s native token, UNI, plays a key role in the platform’s governance and ecosystem. UNI holders can participate in decision-making processes regarding the future development of the platform, including protocol upgrades, fee structures, and the allocation of funds in the community treasury. The token was initially distributed through a community airdrop to early users, and it has since become one of the most widely recognized governance tokens in the DeFi space. UNI also allows holders to vote on governance proposals and improvements to the protocol, ensuring that the platform continues to evolve in a decentralized and community-driven manner.