Definition

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Uniswap

What is Uniswap?

Uniswap is developed on Ethereum’s blockchain and it is a decentralised exchange. A decentralised exchange stands for the platform where the investors can trade in the cryptocurrency and they are not required to create the account of centralised exchanges such as Binance or Coinbase. On Uniswap decentralised exchange, millions of dollars’ worth of cryptocurrencies or tokens are traded on daily basis, and it has evolved as the most used platform across the globe.

Uniswap is an ERC-20 token, that is, transactions related to Uniswap are processed on the Ethereum Blockchain and do not have their own chain to process any transaction. There are numerous cryptocurrencies that are ERC-20. The main advantage offered by the Ethereum blockchain is that it is a Smart Contract technology. Smart Contract empowers the developers to construct valuable protocols on the blockchain, which is not offered by Bitcoins.

Highlights
  • Uniswap is developed on Ethereum’s blockchain and it is a decentralised exchange.
  • Uniswap is an ERC-20 token, that is, transactions related to Uniswap are processed on the Ethereum Blockchain and do not have their own chain to process any transaction.
  • The main advantage offered by the Ethereum blockchain is that it is a Smart Contract technology.

Frequently asked questions (FAQs)

What is the procedure for mining Uniswap?

Uniswap uses liquidity mining for mining Uniswap tokens, also known as UNI. Liquidity mining can be interpreted as yield farming.

To become a part of the liquidity mining, the miner should be using decentralised finance and should put their assets (ERC-20 and Ethereum tokens) in the Uniswap liquidity pool. The investor will be able to generate additional tokens (also known as pool tokens) along with the regular yield. Each pool token indicates the percentage share in the Uniswap liquidity pool. There is a pool fee that is charged in Uniswap.

The pool tokens can be moved across exchanges and can be used in other decentralised applications. When the investor redeems their earnings, after that the pool tokens are destroyed or burned.

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What advantages are offered by Uniswap?

There are many advantages that are offered by Uniswap over other cryptocurrencies and centralised exchanges.

The role of the exchanges reduces significantly when Uniswap is utilised. On Uniswap, the investor can directly enter the exchange of currencies in the Ethereum Wallets, as a result, the involvement of the exchanges reduces. In effect, the risk of being tracked is reduced and security is provided which is not extended by other centralised platforms. Further, a layer of security is added as the investor needs to undergo any KYC for the creation of the accounts, and thus trade is executed in an anonymous manner.

On Uniswap, there is no one entity that controls the whole exchange. Uniswap gained significant attention after popular brokers like WeBull and Robinhood halted the exchange of Gamestop (GME). Then Uniswap came into the picture as no single entity was given any power to halt the assets’ trading and exchange.

On Uniswap, a range of assets can be traded. For instance, the tokenized silver and gold can be traded on Uniswap (if the tokenization process took place on the Ethereum blockchain). The stocks that are tokenized can be traded on Uniswap, such as Google, Tesla and Apple. To meet the regulatory requirements, few stocks have been delisted from the platform. The unlisted tokenized stocks can be traded through other interfaces.

How to liquidate Uniswap?

Investors can invest their Ethereum tokens in a decentralised exchange like Uniswap and earn interest. Ethereum tokens comprised of Ether, native tokens of Ethereum and all the ERC-20 tokens such as ChainLink, Wrapped Bitcoin, DAI and Aave. On the Uniswap V2, if the investor wishes to enter the liquidity pool, then they are required to provide an equal quantity of ERC-20 tokens and Ether tokens. On other hand, in the Uniswap C3, the investor is not required to provide an equal quantity of ERC-20 and Ether tokens.

To balance the crypto assets in the liquidity pool, the Smart Contract technology creates a balance between the quantity of ERC-20 and Ether tokens when there is a change in the price of any token. In case the price of one token increases whereas the price of other tokens remains the same, then it is better to hold the tokens separately, this concept is termed as an impermanent loss.

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In May 2021, UNI V3 was launched by Uniswap, and this upgrade has been termed as concentrated liquidity. This upgrade in the function can be used by Uniswap for 2 years. This upgrade has given it a competitive advantage in the cryptocurrency market. in the UNI V3, non-fungible tokens are used that allows the investors to set the price range to provide liquidity.

For instance, the investor can choose to put their tokens in a pool whose price ranges between $1500 to $2500. The UNI V2 covers the price range from $0 to infinity, which does not ensure efficient allocation of the funds. Uniswap provided an upgrade through which the investors can generate higher earnings, unlike the stablecoins which only move by 1% and then return to $1, which is their average price.

Is it safe to invest in Uniswap?

In the cryptocurrency market, Uniswap has been considered the safest and secure way to trade in cryptocurrencies. There is a direct interaction of Uniswap and the Ethereum wallets, and the hacker needs to gain access to the wallet instead of the exchanges as exchanges do not hold the currencies. In the case of the centralised exchange, the hacker only needs to gain access to the exchange and take out all the money, and it is an easy target. However, in Uniswap, the hacker is required to access all the crypto wallets.

Just like any cryptocurrency, there is a risk of losing the investment in Uniswap also. The early investors have been able to generate huge returns.