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Project Name: Uniswap Protocol
Project Current Stage: Launched – Founded in November 2, 2018
Short Summary: Uniswap is a cryptocurrency exchange that uses a decentralized network protocol. Uniswap is also the name of the company that initially built the Uniswap protocol. The protocol facilitates automated transactions between cryptocurrency tokens on the Ethereum blockchain through the use of smart contracts.
What is the Uniswap protocol?
The Uniswap protocol is completely different from centralized exchanges. It is decentralized, which means that no one owns or runs it, and it uses an automatic liquidity protocol, which is a fairly new way of trading. Uniswap is also completely open-source, which means that anyone can download the code and use it to build their own decentralized exchange. Users can even offer their tokens on the market for free. This is a big difference because most centralized exchanges are focused on making money and charge huge fees to list new currencies.
Because Uniswap is a decentralized exchange (DEX), users have full control over their funds. This is different from a centralized exchange, which requires traders to give up control of their private keys so that orders can be recorded on an internal database instead of on a blockchain, which takes longer and costs more. Keeping private keys makes it less likely that assets will be lost if the exchange is ever hacked. The most recent data shows that Uniswap is the fourth largest decentralized finance (Defi) network, with more than $5.7 billion in crypto assets stored on its platform.
The Uniswap platform was built in 2018 on the Ethereum blockchain, which is the world’s second-largest cryptocurrency project by market capitalization. This makes it work with all ERC-20 tokens and infrastructure, like MetaMask and MyEtherWallet.
How does the Uniswap protocol work?
The “Exchange” and “Factory” smart contracts power Uniswap. These are automated computer programs that are meant to carry out instructions when certain conditions are met. The factory smart contract is used to create new tokens for the network in this case, while the exchange contract handles all token exchanges or “trades.”
Uniswap is an “automatic market maker,” a form of decentralized exchange (AMM). To determine pricing and perform deals, AMMs employ smart contracts. These exchanges lack a central regulatory body to manage orders since they are decentralized. Due to their liquidity pools, AMMs such as Uniswap may facilitate crypto trading. A liquidity pool is a collection of crypto funds from users that are locked in a smart contract. When users wish to trade cryptocurrency, the liquidity pool is employed.
Each time a transaction is made, Uniswap takes a small fee and gives it to the liquidity providers in the pool. These are the people who have put their cryptocurrency into the pool. This is a win-win situation. Because its liquidity providers get a cut of the exchange’s transaction costs, Uniswap is able to offer crypto trading and its liquidity providers earn crypto.
The UNI (Uniswap) token
The Uniswap protocol’s native coin, UNI, grants its holders governance capabilities. This simply implies that UNI holders can vote on protocol updates.
At inception, one billion UNI tokens were created. Over the course of four years, 60% will be handed to existing Uniswap community members, while 40% will be made accessible to team members, investors, and advisers.
Liquidity mining has a role in community distribution. This means that UNI will be given to those who provide liquidity to the following Uniswap pools:
Uniswap Version 3 and some notable enhancements
On the Ethereum mainnet, Uniswap Version 3 (V3) was released on May 5, 2021. Uniswap V3 is an automated market maker that doesn’t hold the money of liquidity providers. This gives liquidity providers more control over their liquidity. In the first statement from March 2021, it was said that L2 Optimism would be deployed soon after the mainnet went live.
Uniswap V3 has some interesting features:
Instead of having a price range from 0 to infinity, Uniswap V3 lets liquidity providers focus on their liquidity by setting a price range. The asset pool’s capital efficiency will improve thanks to the concentrated liquidity feature. Also, liquidity providers will be able to hold multiple positions, each of which will have their own price range.
Upgrades to the TWAP oracle
The TWAP oracle has undergone substantial modifications in the newest edition. In Uniswap V3, the accumulator checkpoints are moved to the core. This lets external contracts compute on-chain TWAPs without keeping the accumulator checkpoint value. Users of Uniswap V3 may additionally calculate the geometric mean TWAP.
A more reasonable cost structure
The focused liquidity feature in Uniswap V3 is supported by a configurable charge structure. V3 has a separate fee schedule for each tier of asset pools, rather than charging a single 0.30 percent cost for each token pair. The new charge schedule is divided into three tiers: 0.05 percent, 0.3 percent, and 1%. The V3 also enables the UNI government to create new charge schedules.
Non-fungibility and liquidity
Because the positions in Uniswap V3 are non-fungible, the fees earned are calculated differently than in previous versions. In Uniswap V2, fees were sent to the asset pool to increase liquidity. In Uniswap V3, however, all fee profits will be deposited as separate tokens instead of going into the asset pool. The ERC-20 coin is not supported by the V3 pool contract. Instead, it requires that the contracts include more information about how the fees will be split up and put back into the business.
Is Uniswap a safe place to store your cryptocurrency?
Your cryptocurrency should be safe on Uniswap, but there are some risks with Uniswap you wouldn’t face on a centralized exchange.
Your funds aren’t really kept on Uniswap for crypto trading. You keep them in your personal crypto wallet. Keeping cryptocurrency on an exchange or with a stockbroker is easier than this, so there is a learning curve. You are ultimately responsible for keeping your crypto wallet secure. Fortunately, most good wallets provide guidelines on how to do so.
The risk with Uniswap and other similar exchanges is that anybody may add a token and create a liquidity pool. Many fraudsters have taken advantage of this using a technique known as a “rug pull,” which is why it’s critical to do thorough research on cryptos and liquidity pools before investing. The following is how a rug-pull can work:
- Scammers generate cryptocurrency tokens and retain a large share of the original supply.
- They provide a decentralized exchange liquidity pool for cryptocurrencies. The scam token is in the liquidity pool, as is a big cryptocurrency like Ethereum.
- They use social media to persuade others to invest in their fraudulent currency.
- When enough people have invested, the fraudster changes the tokens to the other, more stable cryptocurrency in the liquidity pool.
- The value of the phony cryptocurrency falls to zero, leaving most investors with nothing.
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