UNISWAP Explained

By RelyOnCrypto | The.Crypto.blog | 10 May 2021

UniSwap is undoubtedly one of the most relevant and widely debated Decentralized Finance projects. UniSwap is a protocol for decentralized token exchange on the Ethereum Blockchain. UniSwap is a decentralized, permissionless, and censorship-resistant protocol that is implemented as a series of Smart Contracts. UniSwap is based on liquidity pools and the Automated Market Maker, or, to be more specific, a Constant Product Market Maker.

On November 2, 2018, the first version of UniSwap, also known as UniSwap V1, was released to the Ethereum main net. Hayden Adams had put in over a year of effort to create this. What's even more intriguing is that Hayden Adams, a mechanical engineer, began UniSwap with no previous programming experience. When he was working on the first version of the UniSwap protocol, he learned how to write Smart Contracts. Hayden's friend Carl came up with the idea for introducing an Automated Market Maker after reading one of Vitalik Buterin's blog posts outlining the Constant Product Market Maker principle.

EtherDelta was pretty much the only Decentralized Exchange with any momentum as the first version of the UniSwap protocol was being created. While common at the time, EtherDelta was built on an order book model that didn't work well with Ethereum's Layer 1 Blockchain protocol. Apart from that, EtherDelta had a rather unintuitive user interface, which resulted in a bad user experience and a lack of liquidity.

Hayden applied for an Ethereum Foundation grant in July of 2018 while focusing on refining Smart Contracts and planning for a possible main net project. The money from the grant allowed a company called Runtime Verification to audit UniSwap Smart Contracts. To reduce rounding error, the original audit resulted in the addition of additional safety checks and the reworking of certain math operations.

In addition, a complete formal verification was in the works. Hayden wanted to rebuild the user interface before officially launching the protocol in order to have a smoother user experience. The first version of the protocol was released on the final day of the Devcon 4 conference, with an initial liquidity pool of $30,000 distributed through three different tokens. The protocol rapidly gained momentum, resulting in an initial seed investment that enabled the UniSwap team to begin work on the protocol's second version.

UniSwap released UniSwap V2, a new version of the protocol, in May 2020. The inclusion of the ERC20/ERC20 liquidity pools was the most notable feature. Until UniSwap V2, each liquidity had to include ETH as one of the currencies, so to trade from USDC to DAI, for example, the user will have to exchange USDC for ETH and ETH for DAI, resulting in higher gas fees and additional slippage. Offering the ERC20/ERC20 pools was also a safer option for liquidity suppliers who didn't want to risk losing money by supplying ETH. On-chain price feeds and Flash Swaps were among the other features used in V2. All of the V2 Smart Contracts is written in Solidity, which is a fascinating fact. This is comparable to V1, which was written entirely in Vyper. UniSwap V1 was one of the first projects to be published entirely in Vyper.

Despite the UniSwap team urging liquidity providers to move to V2, the first version of the protocol was also actively used alongside V2 for some period due to its decentralized and permissionless design. This also demonstrates the invincible code's true strength.

The UniSwap team received $11 million in series A funding in August 2020 from a number of prominent venture capital firms, including Andreessen Horowitz, USV, Paradigm, and Version One. The funds were used to expand the team and develop UniSwap V3, which would greatly improve the protocol's flexibility and capital efficiency.

Just prior to the release of V2, the UniSwap team began development on a new version of the protocol, the specifics of which were revealed at the end of March 2021. The team has agreed to release UniSwap V3 on the Ethereum main net as well as Optimism; an Ethereum Layer 2 scaling solution, in early May. V3 appears to have totally revolutionized the Automated Market Maker (AMM) domain, and it was undoubtedly one of the most awaited announcements in Decentralized Finance history.

When compared to V2, UniSwap V3 focuses on optimizing resource performance. This not only helps LPs to gain a better return on their investment, but it also greatly increases trade execution, and can now compete with, if not outperform, all Centralized Exchanges and AMMs based on Stablecoins. Furthermore, LPs will build aggregate investments that greatly maximize exposure to desired assets while reducing downside risk due to improved resource performance. They may also apply single assets as collateral to a price range above or below the existing market price, resulting in a free earning cap order that performs in a smooth curve.

All of this is possible thanks to the introduction of a new concept of concentrated liquidity. Aside from that, V3 adds several fee rates and enhances UniSwap Oracles.

UniSwap announced the arrival of their next token UNI in September 2020. The way any of the tokens were retrospectively distributed was the most unexpected aspect of the launch. All who had used UniSwap at least once before September 1st were entitled to receive 400 unique tokens worth around $1,200 on the day of the launch.

The UNI tokens were heavily exchanged in both Centralized and Decentralized Exchanges a few days later, with the token price reaching $8, making the original 400 UNI reward worth about $3,200. UNI tokens were issued to about 50,000 Ethereum addresses, making it one of the most commonly distributed tokens. Furthermore, the protocol's liquidity suppliers were retrospectively credited with additional UNI tokens. A total of 1 billion UNI tokens were distributed. UniSwap also unveiled four incentivized liquidity pools that would award extra UNI tokens to liquidity suppliers. After the initial 30-day governance grace period, UNI holders will opt to add more incentivized pools.

The UniSwap team decided to further decentralize the protocol by releasing a token, rendering it a publicly owned and self-sustaining financial platform. When operating on UniSwap V3 and helping to secure its indestructible and autonomous attributes, the token holders will be allowed to vote on various policies or delegate their votes to a third party in order to engage in UniSwap's governance. There is a lot of debate over the possible future revenue sharing from the protocol with the UNI investors like there is with pretty much all of the governance tokens.

How do you rate this article?




I am an avid crypto enthusiast writing about cryptocurrency


Writing about cryptocurrency topics

Send a $0.01 microtip in crypto to the author, and earn yourself as you read!

20% to author / 80% to me.
We pay the tips from our rewards pool.