Uniswap is a decentralized exchange (DEX) on Ethereum. More specifically, it is an automatic market maker for the provision of liquidity, allowing anyone to provide liquidity and / or make exchanges (“exchanges”) between tokens on Ethereum.
How is different from an exchange like Coinbase
Uniswap is a cryptocurrency exchange run entirely on smart contracts, letting you trade popular tokens directly from your wallet. This is different from an exchange like Coinbase, which stores your crypto for you and holds your private keys for safekeeping. Uniswap uses an innovative mechanism known as Automated Market Making to automatically settle trades near the market price. In addition to trading, any user can become a liquidity provider, by supplying crypto to the Uniswap contract and earning a share of the exchange fees. This is called “pooling”.
How did it grow so fast?
Uniswap was founded by Hayden Adams in 2017, after he was laid off from his job as a mechanical engineer. Inspired by Vitalik Buterin’s ideas on automatic market makers, he learned to code and began to build a decentralized liquidity market.
After growing slowly but steadily for the first year of its existence, Uniswap began to see much faster growth in 2020. Then, in July, its growth rate took off, taking the total capital locked up in Uniswap from $ 50 million to more. $ 150 million in mid-August.
At the end of August, before SushiSwap emerged, Uniswap had $ 200 million in liquidity locked into its smart contracts.
Which are its features?
- Support for all ERC-20 tokens – Anyone can create a market for a token on Uniswap simply by providing liquidity. There are no centralized approval processes or wait times, which attracts followers from many smaller token communities.
- Decentralization – Uniswap’s guiding principle is that it is decentralized and its contracts are open source. Users can confidently interact with the platform without the risks or identity checks of centralized exchanges.
- Flash Exchanges: Similar to Flash Loans, this functionality allows users to “borrow” tokens from a Uniswap group, perform some transaction with external services, and then return the borrowed tokens to the group, all in one transaction. This has increased arbitrage opportunities and led to wider adoption.
- Direct Token Exchanges: While Uniswap V1 only enabled exchanges between ERC-20 tokens via ETH (a process called “ETH bridge”), V2 supports direct exchanges from ERC-20 to ERC-20, essentially halving the gas rates.
- Lower Gas Rates – By rewriting contracts, Uniswap switched from Vyper to Solidity, optimizing contract execution and further reducing gas rates.
- Great Smart Contracts: Throughout Uniswap’s existence, you’ve never experienced a major hack or bug, leading to relying on the protocol that keeps people using and recommending it.
- Thorough Audit: Uniswap maintained its excellent reputation by thoroughly testing and auditing its V2 contracts, including a ConsenSys Diligence audit. It also has a bug bounty program, but no exploits have been found so far, increasing trust in the platform.
- Increased token support: V2 added support for non-standard ERC-20 tokens like USDT and BNB, opening up more potential liquidity pools for popular tokens.