Why Uniswap is Such a Big Deal for DeFi's Liquidity?

Why Uniswap is Such a Big Deal for DeFi's Liquidity?

By DrBreakThru | PayAttention | 30 Nov 2020

On November 2, 2018, Uniswap (UNI) – a protocol for the automated exchange of ERC-20 tokens on Ethereum – was publicly announced and deployed to the Ethereum mainnet:

The launch of Uniswap was perhaps the most important event to happen on Ethereum in 2018. Although, at the time most people had never even heard of it or didn’t realize the impact it would have. 

After all, Uniswap was launched by a one-man army, Hayden Adams, in his basement. All he really wanted to do was to show off his cool project and just help ETH and the Ethereum ecosystem grow.

He didn’t hold an ICO, raise a bunch of money, or deploy any fancy marketing campaigns. He just built a revolutionary open-source DEX protocol and released it in the wild to see how it performed.

And oh boy did it perform:



Today, Uniswap is by far the leading decentralized on-chain DEX protocol on Ethereum with more than $3 billion total value locked (TVL) in its protocol at its peak.

The Before Uniswap Era  

Prior to Uniswap, trading on non-KYC exchanges in a decentralized manner was pretty much non-existent. Decentralized exchanges (DEXes) were still a novel thing. There weren’t very many to choose from and the ones you could use had their fair share of issues. 

EtherDelta was one of the first corners where users were able to trade in a decentralized manner without KYC involved. However, it had a difficult interface and it was like driving a car with that type of wheel:


The interface was rather tricky to navigate and in order to use the exchange; you had to first transfer funds from a personal wallet to the exchange wallet. The same was for withdrawals; you had to manually enter how much to withdraw from your EtherDelta wallet to your personal wallet. 

The whole process was confusing, the EtherDelta interface was intimidating, and it required users to pay gas fees on each and every step; all of which deterred many people from using the exchange.

As for trading on EtherDelta, the complicated interface lead many users to misread and mistype orders and the trades themselves were incredibly slow, with transactions taking hours or days when the network clogged up.


EtherDelta Interface

In addition to EtherDelta’s complicated interface, another major pain point was its liquidity, or rather its lack for bigger players to trade on it. Due to all of its pain points and inefficiencies, it inspired many to take the idea of a DEX and take it to another level. 

The next DEX to gain some traction after EtherDelta was Bancor – a DEX protocol on Ethereum that uses pooled on-chain liquidity for non-custodial token exchange.

Bancor pioneered a new type of DEX that doesn’t use order books; as seen with centralized exchanges and EtherDelta. Instead, Bancor used an Automated Market Maker (AMM) model.

Bancor’s DEX model showed the DeFi space a way to pour in liquidity from idle wallets onto the market via pools. Its novel AMM model is what inspired the models behind Uniswap, Balancer, and other AMMs. 

However, Bancor isn’t the leading DEX protocol now. Uniswap is.

So what went wrong?

Bancor required its liquidity providers (LPs) to provide liquidity with an equal value of BNT (Bancor’s Network Token) and the base ERC-20 token. Uniswap on the other hand enabled LPs to provide liquidity in ETH + the base ERC-20 token. 

Turns out, LPs generally already hold ETH and would rather expose themselves to ETH than having to buy BNT. Therefore, Uniswap simplified the process for users and it generated more liquidity as a result. 

Uniswap - the King of Liquidity


Uniswap website homepage

Liquidity is the King in AMM-based DEX protocols and Uniswap sits on the throne.

Upon launching on November 2, 2018, Uniswap had just $35k total value locked (TVL) in its protocol. Fast forward 1 month later, Uniswap had over $200k TVL, and just 6 months after that it had over $15m TVL.

Uniswap’s growth was pretty steady through 2019, but it wasn’t until 2020 that it went parabolic. It went from $12m TVL at the start of the year to a staggering peak of $3 billion on November 14, 2020:



However, since its peak in November, Uniswap has experienced a steep correction in its TVL when UNI rewards dried up. But make no mistake, it will only be temporary as when Uniswap V3 launches, the DEX is sure to take things to a whole nother level once again. 

Back in December 2019, Hayden Adams, the creator of Uniswap hinted at an impressive Uniswap V3:

Getting back to Uniswap’s growth, there are 2 primary things that played a major role in its explosion to $3 billion:

1) People realized they can make money off their idle assets via pooling

The realization as seen in the tweet above led to parabolic deposits by LPs looking to earn money with their idle crypto assets. LPs on Uniswap earn a portion of the 0.3% trading fees Uniswap charges. 

The $ amount LPs receive is based on the percentage of how much liquidity they provide in a specific pool. This incentivized LPs to provide liquidity to a wide range of popular pools so that they could generate the most income.

2) People were able to pool the tokens against ETH

The second factor leading to Uniswap’s rise in TVL was the ability to add liquidity with ETH as the main trading asset across all pairs as opposed to adding liquidity with BNT, as seen in Bancor. 

Uniswap understood that AMM liquidity providers did not want to take on involuntary token exposure to a specific protocol’s asset. They knew LPs would rather just use ETH as it’s the second-largest cryptocurrency by market cap and is already in most people’s portfolio. 

Thirdly, while not as important as the first two factors, people probably loved the fact that Uniswap was launched by a one-man army in his 'basement' and just wanted to show off his cool project and help ETH grow.

This is just another reason why Uniswap differs from Bancor, which collected $160M in an ICO and centered its entire ecosystem around its own BNT token. However, this doesn’t mean that Bancor is bad whatsoever, just a different take. 

How Community & Investors Reacted?  

The massive success of Uniswap was celebrated and praised by nearly everyone.

Its success proved that a truly decentralized, trustless, and censorship-resistant decentralized exchange protocol could facilitate the unstoppable exchange of digital assets at a scale that competes with centralized exchanges.

In the month of September, Uniswap saw $15.4 billion in volume – making up 65% of the total reported volume by DEXes that month. By comparison, Coinbase – one of the largest cryptocurrency exchanges in America – reported $13.6 billion in monthly trade volume.


Coinbase vs Uniswap monthly trading volume (Source)

Also, in August, Uniswap experienced days where its 24 hr trading volume was higher than Coinbase’s:

Off the tailwinds of Uniswap’s success, a wave of Uniswap clones began launching to market. There was Sushi Swap, Sashimi Swap, Sake Swap, Moon Swap, and more. They all wanted a piece of Uniswap’s success.  

However, while all these were basically 'copy & paste' clones of Uniswap’s code, they did implement a twist. 

They launched their Uniswap-like DEXes along with their own native governance tokens and rewarded them to users for providing liquidity. This incentivized users to pull their funds out of Uniswap and provide liquidity to their copycat exchange.

For a while there, some of these clones did very well. Sushi Swap, the first clone of Uniswap reached $1.42 billion in TVL after just 1 week after launch. Liquidity providers were making bank with Sushi Swap and its SUSHI reward token. 

However, shortly after the attack of the clones, Uniswap decided to do a community-exit; announcing the launch of its own governance token, UNI, and instantly gave 60% of its total supply away to the community. 

Today, Uniswap is now governed by the loyal community of UNI token holders and continues to dominate the DEX space. 

Uniswap’s UNI token currently ranks within the top #30 on CoinMarketCap and is trading at a price of within the range of $3-$3.5. 


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