What Is Uniswap? How Does It Work? A Comprehensive Guide

What Is Uniswap?

Uniswap is a decentralized exchange that allows peer-to-peer market-making1 and trading of digital assets that uses the native UNI ERC-20 token for transactions and incentivization. The Uniswap blockchain is hosted on the Ethereum platform and governed by UNI holders. Well over $1 trillion has been traded on Uniswap since the project was launched, and it has solidified its position as the leading DEX despite growing competition.

Key Takeaways

  • Uniswap is a decentralized exchange that enables the trading of digital assets.
  • It is the leading DEX by cumulative trading volume and market dominance.
  • The UNI token has a market capitalization of $4.3 billion, making it a top 25 crypto.

What Is The History of Uniswap?

In 2018, Hayden Adams, a former mechanical engineer, found himself intrigued by the concept of decentralized exchanges (DEXs). Inspired by Vitalik Buterin’s blog post on automated market makers (AMMs), Adams embarked on a journey to develop a DEX that would revolutionize the way people traded cryptocurrencies2.

On November 2, 2018, Uniswap V0 made its debut on the Ethereum blockchain. Adams’ brainchild introduced the concept of liquidity pools, where users could deposit tokens and earn transaction fees in exchange for providing liquidity. This innovative approach eliminated the need for traditional order books, making the exchange more efficient and transparent.

In May 2020, Uniswap unveiled its second major iteration, Uniswap V2. This upgrade introduced several enhancements, including the implementation of ERC20/ERC20 liquidity pools, which allowed users to swap tokens of different types. Additionally, Uniswap V2 introduced optimized pricing mechanisms and a broader token selection3.

In 2022, Uniswap launched several notable upgrades. The launch of Uniswap V3 in May 2022 marked a significant step forward4, enabling users to customize their liquidity provision strategy, optimize their earnings based on price ranges, and improve the overall DeFi functionality of the platform.

Additionally, Uniswap Labs, the company behind the Uniswap protocol, launched multiple initiatives to expand the DeFi ecosystem, including the introduction of Uniswap Grants5 and the creation of the DeFi Education Fund. In 2023, cumulative trading volume exceeded $1.5 trillion6.

How Does Uniswap Work?

Uniswap is a decentralized exchange platform that uses blockchain-based smart contracts to facilitate the trading of a wide range of digital assets. The platform is deployed on the Ethereum blockchain, which is why its token is an ERC-20. Users can participate in the decentralized exchange in several ways.

Market Making

Uniswap users can use smart contracts to create new markets for exchanging new pairs of digital assets. These markets are created by adding liquidity to a new pool, which requires an equal value of two different digital assets. The smart contract then automatically sets the exchange rate based on the ratio of the two assets in the pool.

Swapping Assets via Existing Markets

Uniswap users can swap digital assets via decentralized markets that have already been created. Users can trade any ERC-20 token on Uniswap without relying on intermediaries or centralized entities. The platform uses liquidity pools to facilitate trades, which automatically rebalance after every trade.

Providing Liquidity and Earning Rewards

Users can provide liquidity to Uniswap by staking their digital assets and agreeing not to trade or sell them. Those who stake their digital currencies on the Uniswap platform are rewarded with UNI, the platform’s native token.

Participating in Uniswap Governance

UNI token holders are empowered to govern the Uniswap platform, with voting power distributed in proportion to users’ UNI balances. This allows users to have a say in the development and direction of the platform.

To participate in the Uniswap network, users must connect to a compatible digital wallet. Additionally, because the Ethereum platform collects fees for processing Uniswap transactions, users need Ether (ETH) to pay any transaction fees they incur.

What Is The Difference Between PancakeSwap and Uniswap?

Uniswap and PancakeSwap are both decentralized exchanges that allow for the trading of digital assets. They use tokens, UNI and CAKE, respectively, to encourage users to provide liquidity. However, PancakeSwap operates on the Binance Smart Chain, while Uniswap uses the Ethereum platform. Uniswap supports ERC-20 tokens, while PancakeSwap supports BEP-20 tokens.

FeatureUniswapPancakeSwap
Blockchain PlatformEthereum (ETH) and Arbitrum (ARB)Binance Smart Chain (BSC)
Transaction FeesHigherLower
Trading VolumeHigherLower
Feature SetBasic trading and swappingMore diverse set of features, including yield farming and other gamified elements.
Uniswap and PancakeSwap offer similar features but operate on different chains.

In terms of trading volume, Uniswap consistently holds a larger share than PancakeSwap. As of December 2023, Uniswap’s 24-hour trading volume on Ethereum is around $800 million and $300 million on Arbitrum. PancakeSwap’s trading volume on BSC is just under $ 200 million7.

In terms of market share, Uniswap also leads PancakeSwap. According to CoinGecko, Uniswap’s market share is currently around 35%, while PancakeSwap’s is around 3%8. This dominance is likely due to Uniswap’s early adoption and established reputation in the DeFi space.

Uniswap is the dominant DEX, even though some competitors have been catching up.
Uniswap is the dominant DEX, even though some competitors have been catching up. Source: CoinGecko

How Has Uniswap (UNI) Traded In 2023, And What Is The Uniswap Price Prediction?

Despite holding its place as the leading DEX and accumulating well over $1 trillion in trading volume, the UNI token has stagnated. Year to date, it has returned just over 10%, which is considerably lower than the overall market. As of writing in December 2023, UNI changed hands at $5.7, which is 87% below its all-time high of $44.9.

Coincodex9 is bullish on UNI despite the relatively lackluster year-to-date performance. They’ve set a maximum price target of $13 for 2024 and $45 for 2025, which would mean a new all-time high. By the end of the decade, they’re targeting between $30 and $40.

Techopedia10 has set an average price target of $7.4 for 2024, which implies solid gains from the current price. Looking further ahead, their targets are very bullish, with a $23 average for 2025 and $28 for 2030.

Remember that crypto prices are extremely volatile, and you should always do your own research before risking your capital. Nothing in this post should be considered as financial advice.

UNI has traded relatively flat for the past year but has surged by over 25% in six months.
UNI has traded relatively flat for the past year but has surged by over 25% in six months. Source: TradingView

Final Thoughts on Uniswap

Uniswap (UNI) has been a core pillar in the cryptocurrency space; as the leading DEX, it has shown that finance can operate without third parties, which arguably paves the way for a fairer and more democratic financial system. The constant upgrades have allowed Uniswap to stay ahead of the competition and control over 30% of the market. Despite the ongoing success of the DEX, the native UNI token has stagnated in the past year, but some analysts expect 2024 to be more fruitful.

Frequently Asked Questions

Where Can You Buy Uniswap?

Uniswap (UNI) can be traded on most major exchanges, including Binance, Kraken, and Coinbase.

What Is Uniswap?

Uniswap is a decentralized exchange (DEX) protocol built on the Ethereum blockchain. It allows users to exchange Ethereum-based tokens without the need for an intermediary. Uniswap is open-source and permissionless, meaning anyone can use it to trade tokens. The protocol is powered by liquidity pools, which are smart contracts that hold tokens and allow users to swap them.

How Does Uniswap V3 differ from previous versions?

Uniswap V3 is an upgrade to the previous versions of Uniswap, which aims to improve the liquidity provision of the protocol. The key difference between Uniswap V3 and its predecessors is the introduction of concentrated liquidity. Concentrated liquidity allows liquidity providers to concentrate their liquidity within a specific price range. This results in increased capital efficiency and lower slippage for traders.

What Is the Utility of the UNI token?

The UNI token is the governance token of the Uniswap protocol. Holders of UNI tokens have the right to participate in the governance of the protocol, including proposing and voting on changes to the protocol. UNI tokens can also be used to pay for transaction fees on the Uniswap platform.

Peter Barker

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Peter Barker

Peter is an experienced crypto content writer and a DeFi enthusiast with more than 3+ years of experience in the space. Previously a journalist and news editor at a leading European news sourcing agency.

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