I’m pretty sure anyone who is in the blockchain and crypto space must have come across or heard about Uniswap. It was the talk of the town these past few months. Uniswap doesn’t need any introduction as far as DeFi is concerned as it still remains one of the heavyweights in the DeFi space at the moment. It took over the scene since it was launched and since then, it has become one of the most used DeFi protocols at the moment. A lot of people received the amazing UNI token airdrop made by uniswap which went to become a mouthwatering airdrop because of the value the UNI token turned out to be.
Uniswap is basically a protocol for exchange of tokens in a decentralized way. In simple terms, it is a DeFi or decentralized crypto exchange on the Ethereum blockchain. One of the amazing things about Uniswap is that it is an open source protocol, which means that anyone anywhere can interact with the protocol. The Uniswap protocol is fully decentralized, deploys smart contracts and is built on the concept of liquidity pools and automated market makers. Uniswap has its own token known as UNI token.
Fully decentralized exchange or DEX - In simple terms, Uniswap is a decentralized exchange built on the Ethereum blockchain used for swapping between Ethereum-based tokens. The main benefit of uniswap is simply that it is fully decentralized, meaning that it is not controlled by any central authority and instead it is decentralized.
Open source - This is another very important aspect of uniswap and that is it is an open source decentralized exchange protocol. This means that anyone can have access to the protocol and contribute to it as well.
Permissionless access to financial services - This is another benefit of uniswap. It is permissionless which means that users can have access to its financial services with security and immutability which fully aligns with the full decentralization of the ethereum blockchain. Before we proceed further, let’s discuss the UNI Token
UNI Token and its Uses
As always, most of the projects built on the Ethereum blockchain has their own token and uniswap isn’t an exception as it has its own token known as the UNI token. This token doesn’t need any introduction in the crypto space because it made a name for itself for its value since the airdrop was made months ago and it is still one of the top tokens out there, ranking in the top 10 on coinmarketcap at the moment.
One of the main uses of the UNI token is for governance. This means that anyone who own the UNI token in cryptocurrency terms we call it holders of the UNI token, can participate in the governance, i.e, have influence and vote on decisions for the development of Uniswap. In addition, the holders can also fund liquidity mining pools, and other proposals as well.
Liquidity Pools, Liquidity providers and How the Uniswap Protocol Work
Liquidity Pools - Liquidity pools on uniswap are simply pairs of Ethereum (ETH) and ERC-20 tokens which are swapped by users in a decentralized way. Example of popular liquidity pools are ETH and DAI, ETH and WBTC, ETH and USDT etc.
Liquidity providers - These are users who add assets to these liquidity pools and in turn earn a proportion of the transaction fees for their contribution efforts. The good thing is that anyone can deposit their ETH tokens into the shared liquidity pools or LP for short and start earning trading fees as rewards for their contributions.
Talking about how the Uniswap Protocol Work, Like I mention above, anyone can partake in these liquidity pools by adding assets to the liquidity pools and start receiving a portion of the transaction fees. So how does the protocol work… users can start with any amount at t a 50/50 ratio or 50% ration between the two tokens. Everytime users trade on the uniswap decentralized exchange, the trader pays 0.3% fee which the goes into the liquidity pool and divided proportionally in relation to the amount each liquidity provider has added to the pool.