Uniswap (UNI) is a protocol built on the Ethereum (ETH) blockchain. Allowing users to exchange their ERC-20 tokens without having to entrust any third parties with custody of your funds is arguably the pivotal difference between a decentralized exchange (DEX) like Uniswap and a traditional centralized exchange (CEX).
Essentially, UNI has been built on something that does not rely on a centralized point of ownership: the users. UNI is technically not owned by anybody. It is a protocol and not a company with its development funded by the Ethereum Foundation. All trading fees are distributed amongst the liquidity providers, which is how UNI maintains its capacity to operate.
Hayden Adams, Founder of UNI
A mere two years ago, UNI launched in November of 2018 after Hayden Adams became inspired by a post made by ETH co-founder, Vitalik Buterin.
This post would ultimately be the catalyst behind Adams’ pursuit of designing the Uniswap protocol. Before this, Adams’ employment history as a software engineer had him performing simulations and engineering design explorations for clients in the aerospace and automotive industries, which would serve as vital experiences in aiding his ability to design UNI. Adams also interned as a mechanical engineer at Vista Wearable, Inc. while spending time as a researcher at Columbia University.
According to Adams, UNI simply began as a side-project. Through the creation of the DEX, he was able to pick up the necessary skills required to complete his final transition from mechanical engineer to a developer within the blockchain space. Adams went on the record to say that he “strongly” believes an open-source financial system will ultimately result in a fairer distribution of wealth, with increased participation by those excluded from our current system. His goal is to “move (UNI) forward as much as possible, and push it in an inclusive (and) equitable direction.”. Creating a more equitable and accessible financial system was foremost in his mind after deciding to raise money for designing the protocol. So, how does it work?
Automated Market Making
Leaving behind the traditional infrastructure of digital financial exchanges, UNI earned its spot at the top of the DEX list by utilizing a design known as Constant Product Market Maker (CMM), which is a variant of a model called Automated Market Maker (AMM).
Don’t be fooled by the fancy name, AMMs are just special smart contracts that hold liquidity reserves (liquidity pools) for traders to utilize. All it takes to become a liquidity provider (LP) is a simple deposit of an equivalent value between the token pairing (ETH + crypto of choice, for instance). In return, LPs receive liquidity pool tokens (LPTs) which serve as a representation of their percentage of the liquidity supplied to the pool.
The UNI Governance Token
If anybody “owns” UNI, there became no doubt it belonged to the vibrant and thriving userbase after this past September’s fabled airdrop. UNI is the native governance token of the Uniswap Protocol. Earlier, we briefly discussed how the protocol was designed to act as a benefit to the cryptocurrency community at large, for the good of the supporters. With the UNI governance token, holders are afforded voting privileges on any proposed changes to the protocol. The UNI token solidifies this idea.
You may be asking yourself which were the UNI community members entitled to the free “crypto stimulus” in the form of 400 airdropped UNI tokens? Well, that’s simple: ANY wallet address that had interacted with a UNI contract (like performing a basic swap). Think of it as repayment for all of those pesky gas fees!