Today we take a quick look at one of the most interesting innovations to come out of the minds of Ethereum developers amid the new, DeFi era of crypto. 

Uniswap

What is Uniswap?

If you keep up on the latest happenings in crypto, you’ve probably heard of the whole DeFi “yield farming” craze and therefore most likely Uniswap as well. Launched on the Ethereum network and taking full advantage of its smart contract capabilities, Uniswap allows users to swap one token for another without having to log in to an exchange and place an order. The entire trading experience can be taken care of automatically and risk-free (granted there are no exploits taken advantage of in the code, which is thus far the case for Uniswap).

The idea was slow to catch on as community-wide distrust of or disappointment in decentralized exchanges (DEXs) stigmatized the idea of smart contracts being able to create a “trustless” trading environment that was in any way competitive with traditional, centralized exchanges. However, Uniswap’s unique approach to the problem has demonstrated itself to be rather foolproof, attracting a huge number of participants and currently witnessing over $60 million per day in trades, or “swaps.”

Today, there’s no easier way to convert one token into another instantly and at a decent rate. Uniswap takes all the stress out of making a trade, making it a favorite among not only DeFi yield farmers looking to quickly shift one token into another, but among bounty hunters as well, who use the platform to cash out tokens earned from performing menial tasks on social media in exchange for ETH. In the last 2 years, Uniswap has supported over $20 billion in volume, utilized by over 250,000 different Ethereum addresses across almost 8,500 ERC20 (Ethereum-based) tokens.

The first version of Uniswap, launched in November 2018, only supported ETH/ERC20 conversions but thanks to Uniswap V2, launched in May 2020, it now supports ERC20/ERC20 conversions. Some of the other features of Uniswap V2 include price oracles (automatic price provision on demand) and flash swaps (a faster method of executing the swap than was available in V1). Both versions render users free from the worries of having to leave coins on an exchange, removing the possibility that they may be lost, stolen or even confiscated by the government.

Uniswap transactions tend to be particularly costly because they execute complex smart contracts in order to swap user tokens. Since these smart contracts take up more space on the blockchain than regular currency or token transactions, it costs more in terms of gas to get the transaction included into a block by miners. There is also a fee of 0.3% placed on every trade; whether liquidity is being added to a pool, subtracted from a pool, or a swap has been requested.

Because the current cost of transacting on the Ethereum network is now higher on average than ever before, using Uniswap now by far exceeds average transaction costs and exchange fees, somewhat putting a dent in its cost saving model. Somewhat ironically, Uniswap is now more popular than its ever been, largely thanks to the trading fury surrounding DeFi but also because Ethereum needs a properly-functioning DEX more than ever.

What is UNI?

A few days ago, Uniswap airdropped batches of their new utility token, UNI, to users who had previously made use of Uniswap and were connected to the platform during the airdrop. For the first 24 hours or so after the airdrop, UNI had a price of about $3, meaning those who participated in the airdrop and received 400 UNI tokens for free had a windfall profit of $1200. However, something unexpected happened soon after: the price of UNI climbed to $4, then $5, then peaked all the way at $8.49 before drifting back down to where it is in the mid $5 range.

In the future, a portion of Uniswap fees will be shared by UNI holders — the feature which theoretically gives value to the token. According to those at Uniswap, the token will also be assisting in Uniswap’s goal of “enabling shared community ownership and a vibrant, diverse, and dedicated governance system, which will actively guide the protocol towards the future.”

Unlike many of its DeFi counterparts, Uniswap has a set, clear goal, a functioning product that is actually useful (and even revolutionary in a way), and several serious investors onboard — one of which is Coinbase, which announced it would be supporting the token only a few hours after its launch. By some metrics, Uniswap’s activity already surpasses that of Coinbase, meaning its potential for grown remains high and likely to continue after the DeFi fad has settled back down to earth.