Originally published in the ChangeNOW blog
Uniswap is Ethereum’s most popular decentralized exchange with $2.1 billion secured in its contracts as of October 2020. This makes the Uniswap exchange occupy one-fifth of all value locked in all decentralized finance applications combined. With an average of 38,000 daily users trading daily on the exchange, it occupies 95% of all decentralized exchange (DEX) trading. In terms of trading volume, it translates to US$263 million daily.
The governance token of the Uniswap exchange is called UNI. The token was introduced on 17th September 2020. Before delving deeper into the basics of the token, let’s have a look at its features and uses. It is important as UNI tokens derive their value from the current stronghold that Uniswap maintains in the decentralized exchange market.
- Zero Listing Fees. In this platform, one can trade any Ethereum-based token. The users stake their tokens in liquidity pools (it determines which tokens are listed). Since the protocol does not have a listing process, it does not charge any listing fees.
- A Wide Variety of Trading Pair Options. In Uniswap V2, users are free to combine any two ERC-20 tokens to form a trading pair. It does not require using ETH. The platform offers a wide range of trading pairs that may go up to as high as 2,000 different types. According to industry experts, the platform surpasses every other exchange in this regard.
- The Non-Custodial Funds Authority. In Uniswap, the funds are not controlled by the platform. It’s the smart contracts that handle user funds. There are two types of contracts: the factory contract takes care of each set of trading pairs, whereas the periphery ones support the system in other ways. Since each trading pair gets a separate smart contract, the funds reach the users’ wallets almost immediately.
- Extendability and Customization Options. Developers are free to extend the platform by creating other crypto versions such as Sushiswap, Zuniswap, Kingswap, etc. Apart from extending its reach, the developers can also create customized interfaces. There are customized interfaces like Uniswap.ninja and Uniswapdex.com through which one can access the exchange with customized variations. In terms of its compatibility, Uniswap also goes very well with available exchange aggregators.
- The Earning Mechanism. The investors can earn revenues from Uniswap fees by simply staking their tokens in the Uniswap pool. For projects, there is also the facility of funding these Uniswap pools to increase liquidity and facilitate trading.
- Centralized Orderbook Absence. Uniswap implements a unique price production approach. It uses formulas based on liquidity ratios in different liquidity pools. Moreover, the platform’s V2 oracles keep on leveraging average price data that are obtained over a period of time. This process results in the prices becoming more authentic and immune to price-manipulation efforts.
- Competitive Fees. The fees are fixed at a nominal rate of 0.3% on each trade. It is closer to the lower end of the crypto-exchange fees spectrum (basically from 0.1% to 1% per trade).
The native Uniswap cryptocurrency (or the Uniswap coin meant for governance) is known as UNI. The token was introduced on 17th September 2020. Following its objective to solve liquidity issues and create efficiency in the decentralized exchanges, the platform has kept its token trading facilities automated and completely open to anyone holding UNI tokens. Governance UNI tokens, introduced to award previous users of the protocol, also add to the profitability potential of the exchange.
While launching UNI, the platform did not take the route of launching an ICO or any other form of a token sale. Rather, it finalized a 4-year release schedule. All the tokens will be distributed as per this schedule. Before we look into the features and benefits of the UNI token, let’s have a quick look at its tokenomics.
The total supply of the platform’s governance token is 1 billion UNI tokens. As it has been mentioned earlier, these one billion Uniswap coins will be made available over 4 years. Once the distribution of the UNI tokens is complete, the exchange is set to introduce a “perpetual inflation rate” of 2% to maintain participation in the network.
The current supply of the circulating UNI tokens surpasses the number of 222 million units. Their current distribution segments are as follows:
- 60% of the tokens are held by the protocol users.
- 21.51% are held by the team members.
- 17.8% of the currently circulating Uniswap volume is near the investors.
- The rest (0.69%) is owned by the advisors.
Out of the tokens set to be distributed among the users, 15% are to be claimed by those who used them before 1st September 2020. Even users with unsuccessful transaction histories are allotted 400 UNI tokens.
One may ask, what are the benefits of holding UNI governance tokens? Firstly, UNI holders are empowered to voice their opinions by voting on the platform’s development decisions. Secondly, the UNI token holders are capable of funding grants, partnerships, liquidity mining pools, etc. Finally, the importance of holding UNI tokens will increase as the Uniswap team is about to dissociate itself from the protocol.
The UNI token holders earn their revenue by staking their tokens in a liquidity pool. There are thousands of users attracted by the popularity of the protocol! However, the increase in their number does not guarantee any additional profit. Let’s have a look at the most profitable scenario possible…
As we already know, the standard fees are fixed at a rate of 0.3%. This fee is split between all the members of the liquidity pool. Therefore, the larger the number of participants in a liquidity pool, the lesser is the profit. Still, there is another important aspect to it! If the pool trading volume becomes lower, the chances of having good earning turn smaller as well. Therefore, a user profits the most if a liquidity pool attracts a lot of traders but has fewer liquidity providers.
Uniswap farming, with a market dominance of 21.18%, finished the liquidity mining program that ended on November 17th. The members of the community are yet to decide on a series of governance decisions before farming restarts on December 4, 2020. At the moment, a proposal created by Audius strategy lead Cooper Turley and a pseudonymous user calling themselves “Monet Supply” is up for governance polls. The proposal suggests continuing farming with the same four asset pairs (WBTC/ETH, USDC/ETH, USDT/ETH, and DAI/ETH).
The liquidity mining allocations are expected to be nearly 1.25 million UNI tokens per asset pool every month.
Regarding Uniswap Second Airdrop, the proposal to retroactively airdrop 400 UNI (5,047,600 tokens in total) to 12,619 accounts that had used the platform through a third-party dapp has been retracted. This proposal has failed to pass through currently established voting guidelines. Although 37.5 million UNI were in favor of the proposal compared to a mere 1.3 million against it, it still failed to garner the necessary 40 million UNI.
Undoubtedly, Uniswap has already turned out to be the most popular decentralized exchange. Simultaneously, it has also come up as one of the most convenient options for Ethereum investors. Uniswap liquidity pools and the variety of trading options they provide have proved to be really beneficial for investors. As far as Uniswap offers open governance and implements decentralization approaches, it also becomes favored by the users opposing big crypto companies.
Overall, Uniswap took on the highly appreciated role of a decentralized trading protocol facilitating automated trading of decentralized finance tokens. Moreover, its efforts to bring more liquidity and efficiency to the DEX system would help it to move up the ladder and attract more users in the days to come. With the introduction of the UNI token, the exchange is moving towards the path of true decentralization.
As Uniswap is the de facto leader in the DEX space, it will compel other major players to start the process of handing over the governance to the users. Isn’t that what decentralization stands for? It would definitely be interesting to see how UNI tokens influence the future of the crypto community!