Having a constant numeraire provides a nice UX advantage — users can swap any ERC20 for any other ERC20 by routing through ETH. Since ETH is the most liquid Ethereum-based asset, and does not introduce any new platform risk, it was the best choice for Uniswap V1. By concentrating their liquidity, LPs can provide the same liquidity depth as v2 within specified price ranges while putting far less capital at risk. The capital saved can be held externally, invested in different assets, deposited elsewhere in DeFi, or used to increase exposure within the specified price range to earn more trading fees.
What is the UNI token?
Without any additional growth, it will generate more than $5M in liquidity provider fees this year. If the protocol charge was on, ~$830,000 of this would instead go to a decentralized funding mechanism used to support contributions to Uniswap and its ecosystem. On-chain price feeds are a critical component for many decentralized financial applications including those similar to derivatives, lending, margin trading, prediction markets and more. Despite closely tracking the real-world price most of the time, Uniswap V1 cannot be used safely as a price oracle because the price can move significantly in a short period of time. One example would be a DAI/USDC pair, which should theoretically have little volatility for liquidity providers, but is useful for trading. Uniswap is a decentralized exchange that enables peer-to-peer market making.
How does Uniswap work? Understanding automated market makers (AMM)
If the Uniswap pool does not receive enough DAI to cover the ETH withdrawn, then the entire transaction will revert; thus, all ERC20 tokens are returned or paid for at the end of the transaction. This variable can be used by external contracts to track accurate time-weighted average prices (TWAPs) across any time interval. Attackers will lose money to arbitrageurs, unless they can “selfishly” mine two blocks in a row. This type of attack presents a number of challenges and has not been observed to date. Once DAI trades above 1.002 DAI/USDC, Alice’s liquidity will have fully converted into USDC. Alice must withdraw her liquidity (or use a third-party service to withdraw on her behalf) to avoid automatically converting back into DAI if DAI/USDC starts trading below 1.002.
The benefits of Uniswap: decentralization, liquidity, and accessibility
The license limits use of the v3 source code in a commercial or production setting for up to two years, at which point it will convert to a GPL license into perpetuity. As a byproduct of per-LP custom price curves, liquidity positions are no longer fungible and are not represented as ERC20 tokens in the core protocol. V3 oracles are capable of providing time-weighted average prices (TWAPs) on demand for any period within the last ~9 days. This removes the need for integrators to checkpoint historical values. The Uniswap Protocol is not controlled by a single entity, but rather a community of individuals and organizations is responsible for stewarding the world’s biggest AMM protocol. Users and organizations that hold UNI can use it to vote on decisions related to the Protocol.
We expect like-kind asset pairs to congregate around the 0.05% fee tier and pairs like ETH/DAI to use 0.30%, while exotic assets might find 1.00% swap fees more appropriate. If market prices move outside an LP’s specified price range, their liquidity is effectively removed from the pool and is no longer earning fees. Users trade against the combined the death of lifo liquidity of all individual curves with no gas cost increase per liquidity provider. Trading fees collected at a given price range are split pro-rata by LPs proportional to the amount of liquidity they contributed to that range. Additionally, traders are often subject to high degrees of slippage as liquidity is spread thin across all price ranges.
The Uniswap Protocol is the largest decentralized exchange for swapping cryptocurrency tokens on Ethereum and other popular blockchains. Launched in 2018, it is the world’s largest and most popular decentralized https://cryptolisting.org/ exchange, with over $1.8 trillion in trading volume and 350 million swaps. Uniswap V2 implements new functionality that enables highly decentralized and manipulation-resistant on-chain price feeds.
- Pairs of digital assets are swapped via liquidity pools, which use smart contracts to automatically rebalance after every trade.
- Alice and Bob both want to provide liquidity in an ETH/DAI pool on Uniswap v3.
- V3 is open source with slight modifications, which are viewable here.
- As a byproduct of per-LP custom price curves, liquidity positions are no longer fungible and are not represented as ERC20 tokens in the core protocol.
Most publicly accessible markets use a central limit order book style of exchange, where buyers and sellers create orders organized by price level that are progressively filled as demand shifts. Anyone who has traded stocks through brokerage firms will be familiar with an order book system. Once you’ve connected your wallet, you can choose the tokens you want to trade. You can select from a wide range of tokens, either by navigating to the token details page, or entering the token directly. It is often the case that a series of transactions on Ethereum has a high upfront cost but ultimately a low net cost or is even net profitable by the end of the series.
If this is your wallet’s first time trading this token with the Uniswap Protocol, you need to approve the token first. This additional approval is an extra layer of security to protect your funds. Decentralized exchanges (DEXs) like the Uniswap Protocol offer several benefits over traditional centralized exchanges (CEXs). Key benefits include decentralization, self custody, transparency, improved liquidity, and greater accessibility. If two ERC20 tokens are not paired directly, and do not have a common pair between them, they can still be swapped as long as a path between them exists. Router contracts can be used to optimize between direct and multi-step swaps.
Over time we expect increasingly sophisticated strategies to be tokenized, making it possible for LPs to participate while maintaining a passive user experience. This could include multi-positions, auto-rebalancing to concentrate around the market price, fee reinvestment, lending, and more. By doing so, an LP can approximate the shape of any automated market maker or active order book. V3 is open source with slight modifications, which are viewable here. Each version of Uniswap, once deployed, will function in perpetuity, with 100% uptime, provided the continued existence of the Ethereum blockchain. On a limited set of token pairs, Uniswap Labs charges a flat fee of 0.15% to sustainably fund our operations.
In Uniswap V2, any ERC20 token can be pooled directly with any other ERC20 token. Wrapped Ether (WETH) is used instead of native ETH in the core contracts, although end users can still use ETH through helper contracts. As a venue for pooled, automated liquidity provision on Ethereum, the Uniswap protocol (Uniswap) functions without upkeep, providing an unstoppable platform for ERC20 token conversion. Uniswap V1 will continue to work for as long as Ethereum exists, and so far, it has worked very nicely for a wide variety of use cases. With this in mind, Uniswap v3 Core will launch under the Business Source License 1.1—effectively a time-delayed GPL-2.0-or-later license.
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