The uniswap is a broker cryptocurrency decentralized (DEX) installed on the development of the Ethereum system. It is part of the blockchain's DeFi ecosystem and allows users to exchange cryptocurrencies and tokens and perform other financial transactions, without the need for intermediaries.
It was created on November 2, 2018, by Hayden Adams. Its governance token, UNI, had an initial airdrop distribution on September 16, 2020. The token has been valued considerably, bringing, even more, community interest and attention to DEX. It traded above US$40 in May 2021. In the cryptocurrency market capitalization ranking, UNI is in 11th place, with US$9.2 billion. Today, its quote is around $18.
Operation
Decentralized brokerages bring advantages when compared to centralized ones, including fewer problems related to the centralization of arbitrary fees, inefficient management, or hacker intrusion risks. However, DEXs can present obstacles due to a lack of liquidity, which influences the speed and efficiency of transaction execution.
One of the reasons for Uniswap's rapid growth in popularity was the new proposal to provide liquidity through pools. Instead of always pairing a buyer and seller, each time a transaction needs to be executed, DEX uses an AMM (Automatic Market Maker): a system that uses automatic mathematical equations ( smart coTwo assets are deposited in each liquidity pool, which respects the equation x * y = k. Variables x and y represent the number of tokens, for example, ETH and another ERC20, and k is a fixed constant. When one token of the pair appreciates or depreciates due to user buy and sell operations, the other token will be bought or sold to make up the difference and keep the value of k constant. Uniswap seeks to balance the value of tokens and exchange them based on supply and demand: how much people want to buy or sell them.
Users can become liquidity providers by locking their ERC20 tokens in liquidity pools — something akin to bank deposits. DEX, being decentralized, does not seek to accumulate profit with transaction fees, like traditional brokerages. Instead, liquidity providers (LP) receive 0.3% of fees as a deposit incentive. The remainder of the fees is used to pay for the execution of the Ethereum network's smart contracts, without capital surplus accumulation.
This strategy of passively receiving profits by providing liquidity is known as liquidity mining. There are specific dapps that manage investors' funds, withdrawing and reapplying them constantly in different liquidity pools. These protocols, like Yearn Finance, seek to automatically optimize earnings by searching for pools with higher yields in real-time.
Listing of new ERC20 tokens
After the development of ERC20 Token and or any other token, the platform allows any token to be made available for trading. Each token has its pool and smart contract. If the pair does not already exist, it can be created by any user. To create a pool, it is necessary to deposit an amount of ETH and ERC20 tokens, with equal values. From there, anyone can contribute to the pool's liquidity and receive the 0.3% fee from all transactions that take place within it.
This facility makes most altcoins debut first on DEX such as Uniswap, Sushiswap, and Binance. They usually only appear in centralized brokers, which operate with fiat money, when pressured by high user demand, at a later point of maturity. UNI, for example, only started trading on the Bitcoin Market on May 11 this year.
Yield Farming
The platform also allows for other investment and position leverage strategies such as yield farming.
The yield farming works as a loan token before collateralization of another asset and the payment of an interest rate to the lender. The original asset is blocked, and the asset purchased on loan can be sold to buy more of the original asset. The strategy allows for the leverage of profits, should the price of the original asset rise, but it also increases the risk of loss.
Conclusion
Although Uniswap has been around since 2018, it was only after the release of the V2 update in 2020 that its popularity grew. This version now allows, among other advances, the direct exchange between any two ERC20 tokens, without necessarily involving ETH in the transaction.
In May 2021 Uniswap V3 was released, bringing several changes, such as multiple fee levels and concentrated liquidity. These new tools will allow users to manage risk more efficiently.
DeFi's liquidity mining and yield farming platforms enjoyed a dramatic rise in popularity in 2020, a phenomenon that, as we have seen, was reflected in the intense appreciation of the native UNI token. However, investors should be aware that decentralized brokers are a very recent modality, still partially unknown and unexplored.
It is always reasonable to assume that there are hidden security holes in the protocols, which could be exposed to hacker attacks — something more frequent than you think.
When choosing a decentralized broker, it is important to analyze all aspects of the security and reliability of the platform's open-source. Larger DEXs, such as Uniswap, subject their protocols to a periodic security review and testing and generally make the results publicly available.
