Discovering Uniswap DAO
Uniswap is the most successful implementation of a decentralised exchange to date.
It was launched in November 2018, after just a year of development by a mechanical engineer, Hayden Adams, who claimed he first had to learn to code.
The concept is built on the first automated market making initiatives of the early 1990s and learnings from earlier projects, such as 0x and Bancor. The project gained Ethereum founder Vitalik Buterin’s support and was launched a few months after receiving a grant from the Ethereum Foundation in November 2018.
Following the Version 3 launch in 2021, Uniswap was deployed on Ethereum scaling solutions Optimism and Arbitrum, and in December 2021, on the Polygon network to achieve lower fees and thus access to a wider user base.
What is Uniswap?
Uniswap is an open source software, one of the largest decentralized cryptocurrency exchanges by transaction volume, and a leader within the decentralized finance (DeFi) space.
For many years, centralised exchange sites (CEX) have reigned over the undivided crypto asset market. Uniswap was brought in the market to tackle this power and control issues prevailing in the market.
In short, Uniswap is a series of smart contracts that live on Ethereum and are not controlled or owned by a single entity.
Decentralized Exchanges (DEXs) are new types of marketplaces leveraging Blockchain technology.
Automated market makers (AMMs) are a type of DEX that uses algorithmic 'money robots' to "make it easy" for individual traders to buy and sell crypto assets. Instead of trading directly with other people as with a traditional order book, users trade directly through the AMM.
In summary, it obviates the need for trusted intermediaries, prioritizing decentralization, censorship resistance, and security.
Liquidity Pools
Anyone can lock specific cryptocurrencies in order to receive both UNI tokens for providing liquidity (which can in turn be automatically sold via specific platforms or instead stored), and a reward from the network. Thus, the term liquidity pool refers to a quantity of cryptocurrencies that are locked in a certain type of smart contract.
How it works?
When a trade is made, Uniswap's AMM algorithm determines the actual price of the token based on the supply and demand dynamics between tokens involved in these liquidity pools.
When users trade with a Uniswap liquidity pool, the platform currently charges a transaction fee of 0.3%.
But what happens to this percentage earned?
Any user who contributes to a Uniswap liquidity pool receives a fraction of these fees proportional to their staked share of the entire pool.
Uniswap does not collect any of the transaction fees charged on its platform; instead, profits are distributed solely among Uniswap’s community of users.
The company also earns revenue through the UNI governance token, which can increase in value with changes in the cryptocurrency markets.
Each market pair of ERC-20 tokens held in a liquidity pool (e.g., ETH/DAI) is governed by an AMM built to accept one token for the other by maintaining what’s known as the "constant product" formula of x*y=k.
For example, suppose David buys 1 ETH for 1600 DAI using the ETH/DAI liquidity pool. In this way, David has increased the amount of DAI in the pool while reducing the amount of ETH. This effectively means that the price of ETH goes up, because there is less ETH in the pool after the transaction and we know that the total liquidity (k) must remain constant.
What is UNI token?
In September 2020, Uniswap introduced UNI, a native governance token that facilitates greater community involvement and oversight.
UNI holders can vote on Uniswap project developments that determine the platform's evolutionary trajectory. UNI holders can also use the token to fund liquidity mining pools, grants, partnerships.
UNI’s governance token builds upon the principle of community self-sufficiency by enabling stakeholder involvement in protocol decision making, and the platform itself serves as a successful model of what DAOs are capable of.
By holding UNI you’re speculating and investing in a governance and protocol that dominates the majority of DeFi on Ethereum. Uniswap is the face of DeFi - wouldn't you like to own part of it?
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