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How Does Uniswap Work?

By Austin Reihl | Cyberfeed | 4 Feb 2021

Uniswap (UNI) is a decentralized protocol for automated liquidity provision on the Ethereum (ETH) blockchain. In this article, we’ll take a look at the latest version of UNI and how it works. It’s safe to say UNI-V1 paved the way for its successor - while V2 may be the version of Uniswap most recent users are familiar with, UNI-V1 was the current protocol’s forerunner.


How It Works


Liquidity providers (LPs) help to increase the longevity and overall health of the UNI protocol - without them, a decentralized exchange (DEX) like UNI would be unable to exist.


UNI balances liquidity in pools to afford users the ability to interact with the protocol. These liquidity pools are just smart contracts that store ERC-20 based assets. Assets are provided to LPs by liquidity providers - the beauty of this feature is that anybody can add liquidity to a pool or make a new one by interacting with the Pool feature and creating a new token pair. As incentivization for contributing to an LP, liquidity providers receive a percentage of all trading fees in proportion to how much of the pool they own. (ex: 50% of pool owned = 50% of trading fees received).


Features & Capabilities


Uniswap is the world’s first fully-functional decentralized protocol for automated liquidity provision, and is host to several key features, each serving a vital role in the decentralized finance (DeFi) ecosystem supported by the protocol. These features include:

  • SwapExchange any ERC-20 token to another with no restrictions.
  • Pool – Provide liquidity in return for a percentage of trading fees and help strengthen the UNI protocol.
  • Oracles/Price Feeds Uniswap features decentralized on-chain price feeds, also known as oracles, which help keep pricing data resistant to manipulation.

Final Thoughts


Before Uniswap, the idea of trading on a DEX was foreign to most cryptocurrency traders, and since late 2018, the Uniswap protocol has grown to rival and ultimately surpass traditional centralized platforms, utilized by traders and holders alike. Despite having significantly fewer features, UNI-V1 was a pioneer within the space. Following the initial success of UNI's launch, the team behind the DEX set out to refine and further perfect the protocol - not even two years passed since the inception of Uniswap's first iteration before V2 was live and operational.

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Austin Reihl
Austin Reihl

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