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.