1. What is Uniswap?
Uniswap is an open-source protocol and non-custodial crypto-exchange that allows you to securely exchange Ethereum (ETH) and ERC-20 tokens without using the traditional order book model.
Uniswap combines tokens into smart contracts, creating liquidity pools. Platform members can swap assets, create new trading pairs, and add tokens to pools to earn commissions.
2. Who created Uniswap and when?
The Uniswap protocol was created by developer Hayden Adams.
On July 6, 2017, Adams retired from Siemens, where he worked as a mechanical engineer after college. Adams’ friend Carl Flersch, who worked at the Ethereum Foundation, advised him to become a smart contract developer.
Gnosis project developer Alan Liu was the first to consider creating market makers on Ethereum using the x*y=k equation. Liu’s Gnosis colleague Martin Koppleman suggested the idea to Vitalik Buterin, who presented it in articles on his personal blog and on the Reddit platform.
In August 2018, Adams received a $100,000 grant from the Ethereum Foundation to implement the concept.
Adams was assisted in creating Uniswap by Microsoft and Google developer Callil Capuozzo, programmers Uchiel Vilchis, Philip Dayan, Dan Robinson, Andy Milenius and others.
By March 2018, developers introduced a demo version of Uniswap. On November 2, 2018, the full version of the protocol was launched.
In presenting Uniswap, Adams listed its main features:
“No central token or platform commission. No special treatment for early investors, users or developers. The token listing is free. All smart contract features are open and can be improved.”
3. Who came up with the name Uniswap?
Adams originally wanted to call the protocol Unipeg, a derivative of the words Unicorn and Pegasus. When Karl Flersch first told Vitalik Buterin about the project, he said: “Unipeg? Uniswap sounds better.” Adams agreed to the suggestion.
4. How does Uniswap work?
The Uniswap protocol involves a series of smart contracts that allow anyone to trade directly with each other on the Ethereum blockchain. Technically, it is a decentralized exchange (DEX).
Uniswap is a publicly available tool that distributes rewards to liquidity providers. Providers support the exchange by “locking” tokens, which allows other users to trade in the decentralized system.
The platform does not require registration or KYC and AML procedures. Only an Ethereum wallet like MetaMask is required. A distinctive feature of Uniswap is the use of a mechanism called Constant Product Market Maker.
One can freely add an Ethereum asset to Uniswap by funding it with the equivalent value of ETH and a traded ERC-20 standard token. For example, if a user wants to exchange a Poop Token, they launch a new smart contract for Poop Token and create a liquidity pool with a $10 Poop Token and a $10 ETH.
Uniswap doesn’t bind buyers and sellers to set the price of the Poop Token, but uses an equation: x * y = k. In the equation, x and y represent the number of ETH and ERC-20 tokens available in the liquidity pool; k is a constant.
Based on the balance between ERC-20 and ETH tokens, as well as between supply and demand, the equation calculates the price of a particular token.
Each token has its own smart contract and liquidity pool. Any user can trade this coin or deposit funds into the liquidity pool, receiving a 0.3% exchange fee.
5. How are Uniswap tokens created?
Whenever new tokens are added to the Uniswap liquidity pool, the user receives an ERC-20 standard “pool token”. The pool tokens can be exchanged, moved and used in other decentralized applications.
When the funds become in demand, the pool tokens are burned. Each pool token represents the user’s share of the pool’s total assets and a share of the pool’s trading commission of 0.3%.
6. How are tokens exchanged on Uniswap?
The Uniswap protocol is available through the uniswap.org interface. You can connect to it using an Ethereum wallet, such as MetaMask.
The user can exchange tokens or add assets to the Uniswap liquidity pool. The user must select the token the user wants to receive and the asset to be paid with. The user must then approve the transaction with their wallet and confirm the transaction by paying a fee to the Ethereum network.
Because Uniswap is an open-source smart contract protocol, several user interfaces have already been created for it. For example, InstaDApp allows you to add funds to Uniswap pools without accessing the exchange interface.
The Zapper.fi interface allows you to add funds to Uniswap pools using only Ethereum, not ETH or another token. This service also offers “one-click” solutions for buying pool tokens in combination with bZx strategies.
7. What is Uniswap v2?
In April 2019, the project team raised more than $1 million in a funding round led by investment firm Paradigm. These funds were used to create the second iteration of Uniswap with a number of new technical features.
The ability to exchange any ERC-20 token with each other
In Uniswap V2, any ERC-20 token can be placed in a pool with any other asset of the same standard. Basic contracts use Wrapped Ether (WETH) instead of native ETH, although end users can still use ETH through ancillary contracts.
If two ERC20 tokens do not form a direct pair and do not share a common pair between them, their swap is possible as long as there is a path between them. Router contracts are used to optimize direct and multi-stage swaps.
Improved control of quotes
Uniswap V2 has improved control of quotes through the use of oracles.
Instant swaps provide the ability to withdraw “as many coins as you like” for arbitrage and margin trading, for example.
8. How is Uniswap evolving?
Although Uniswap launched in November 2018, for a long time the protocol was inferior to centralized exchanges and, in the DeFi sphere, to lending protocols like Maker. An important factor in the project’s success was the launch of an updated version of the platform.
In August 2020, a fork of Uniswap called SushiSwap took place: a protocol with the SUSHI control token appeared. In the first phase, the fork allowed existing Uniswap liquidity tokens to be placed in the protocol to generate revenue. The second phase began migrating funds into pools on SushiSwap.
SushiSwap initially poached the lion’s share of Uniswap users’ funds, but as SUSHI token distribution decreased, it lost its former liquidity. Uniswap’s leadership strengthened with the release of the management token UNI, which was announced on September 16.
Shortly after UNI’s launch, analyst firm Glassnode concluded that Uniswap’s management tokens are not blocked in the smart contract and reside on regular Ethereum addresses, raising questions about the degree of decentralization of the exchange.
Thanks to the implementation of UNI, the volume of blocked funds (TVL) on Uniswap has not only returned to its previous values, but even exceeded them.
On December 24, 2020, Uniswap completed the third vote to approve the proposed changes for the first time: community representatives spoke out about the UNI token ecosystem grant program.
The first stage of funding is designed for small projects, including hackathons. In the future, grants will be given to more substantial initiatives. Starting in 2021, organizers will start accepting applications for event support in the form of rewards for their participants. A wider community will be involved in decision-making.