Decentralized Exchanges (DEX) on Blockchain



Uniswap is a decentralized exchange that enables peer-to-peer market making. The Uniswap platform enables users to trade cryptocurrencies without any involvement with a centralized third party.

The Uniswap blockchain is hosted on the Ethereum platform and governed by UNI holders. The Uniswap blockchain is open source, meaning that anyone can view and contribute to the blockchain’s code.

  • Uniswap is a decentralized exchange that enables the trading of digital assets.
  • UNI is the cryptocurrency the Uniswap platform uses.
  • Anyone can earn UNI by agreeing to not sell or trade their crypto holdings.
  • The Uniswap platform is governed by UNI holders in proportion to how much UNI they own.

The Uniswap platform can support the exchange of any digital token that adheres to the Ethereum technical standard known as ERC-20. Uniswap uses smart contracts, which are enabled by blockchain technology, to function as an automated market maker. Uniswap users can securely create liquidity pools, provide liquidity, and swap a variety of digital assets.

As a decentralized exchange, Uniswap uses a permissionless design. The Uniswap protocol is available for anyone to use, and the Uniswap platform has no ability to selectively restrict access. Anyone who chooses can use Uniswap to trade digital assets, provide liquidity, or create a new market in which to exchange a new pair of digital assets.

The automation provided by smart contracts can make trading assets more efficient. Uniswap uses smart contracts to also avoid liquidity issues that traditionally affect centralized exchanges. The elimination of any rent-seeking third party, such as a centralized exchange or financial institution, can also reduce transaction processing fees.

What is a DEX?

As the number of digital assets has grown, the need to facilitate fair exchange of these assets has increased. In traditional financial markets (TradFi), exchanges of different financial products, currencies, stocks and bonds with fiat currency and as cross-product exchanges for mainstream products have deep and liquid markets. These are all run on and facilitated on centralized exchanges and have issues with inefficiency, settlement time, and transparency.

Exchanges for digital assets are both centralized and decentralized. Taking centralized exchanges first, examples are Coinbase and Binance, which have a large number of tokens and facilitate digital asset to digital asset and digital asset to fiat exchange. But these exchanges themselves are not publishing all trades to the blockchain, hence are not fully transparent and control which projects can be listed – also in many cases, they are charging large listing fees and high transaction fees.

Decentralized exchanges (DEXs) seek to enable any project to be able to facilitate the liquid exchange of a token with respect to another token through the provision of liquidity pools. To make a market between two tokens, you deploy two pools of these tokens, attract other users to deposit those pairs of tokens and enable automated marketing making functions to price the exchange of these two assets algorithmically.

DEXs differ from centralized, conventional order book exchanges. Instead of orders and market makers facilitating liquidity through price, algorithmic functions control this, allowing the exchange rates to move along predefined trajectories. This type of exchange mechanism is defined as Automated Market Maker (AMM) functions.

Users can be incentivized to contribute to liquidity pools and add tokens by earning reward tokens from the protocols for participation and earning exchange fees.

DEX’s offer enterprises that wish to create liquidity with any digital asset they create and exchange digital assets easily without relying on any centralised operator to facilitate liquidity. This is useful when seeking liquidity for any token projects that they create, and for facilitating liquidity on any token holdings that they may have – particularly in their treasuries. A benefit of course are the reward tokens that can be earned by participating in a pool in a DEX, which themselves have value in the market.

Benefits & Outcomes

Some of the potential advantages of decentralized exchanges like Uniswap include:

  • Self ownership – Funds are never transferred to any third party or generally subject to counterparty risk (i.e. trusting your assets with a custodian) because both parties are trading directly from their own wallets.
  • Global and permissionless – There is no concept of borders, or restrictions on who can trade. Anyone with a smartphone and an internet connection can participate.
  • Pseudonymous – No account signup or personal details are required
  • User-friendly design – The Uniswap app is very user-friendly, so it doesn’t take long to learn how it works. It’s easy to connect a crypto wallet, swap one crypto for another, or deposit your crypto in a liquidity pool
  • Earn crypto with liquidity mining – Anyone can deposit their cryptocurrency into these pools and become a liquidity provider. This is called liquidity mining. Uniswap charges a small fee on every crypto trade, and it distributes that fee among all the liquidity providers for that pool.
Further Info

“Uniswap is a completely different type of exchange that‘s fully decentralized – meaning it isn’t owned and operated by a single entity – and uses a relatively new type of trading model called an automated liquidity protocol (see below).

The Uniswap platform was built in 2018 on top of the Ethereum blockchain, the world’s second-largest cryptocurrency project by market capitalization, which makes it compatible with all ERC-20 tokens and infrastructure such as wallet services like MetaMask and MyEtherWallet.

Uniswap is also completely open source, which means anyone can copy the code to create their own decentralized exchanges. It even allows users to list tokens on the exchange for free. Normal centralized exchanges are profit-driven and charge very high fees to list new coins, so this alone is a notable difference. Because Uniswap is a decentralized exchange (DEX), it also means users maintain control of their funds at all times as opposed to a centralized exchange that requires traders to give up control of their private keys so that orders can be logged on an internal database rather than be executed on a blockchain, which is more time consuming and expensive. By retaining control of private keys, it eliminates the risk of losing assets if the exchange is ever hacked. According to the latest figures, Uniswap is currently the fourth-largest decentralized finance (DeFi) platform and has over $3 billion worth of crypto assets locked away on its protocol.”


Uniswap is launched and trading $$$’s of value on chain

Researched by Antony July 2023

© Antony Welfare 2024