Evolution of decentralized finance (DeFi): Uniswap
For several years, there have been projects around the world trying to replicate basic financial services, such as securities lending and electronic trading, using blockchain technology. Uniswap clone They are called DeFi (for its acronym in English Decentralized Finance) or Decentralized Finance.
All this begins with the creation of the Ethereum network (ethereum.org), a technological community that seeks to improve the use of cryptocurrencies, in particular ether (ETH) and hundreds of decentralized applications. Ethereum was financed through an ICO in 2014 (Initial Coin Offering, also known as a “token sale”, a hybrid between crowdfunding and IPO — Initial Public Offering). Buyers received ether in exchange for bitcoin and more than 7 million ether were sold in the first 12 hours, totaling approximately $2.2 million. At the end of the sale period, more than 50 million ether were sold, reaching US $17.3 million (9.9% of the issued ether remained in the hands of the founding team and another 9.9% went to the non-profit foundation). Ethereum profit).
This network initiated the use of the “Smart contract” protocol, which allows developers to create tokens similar to ether (under the ERC-20 standard) and platforms with relative ease. Uniswap clone script The adoption of Ethereum accelerated with the popularity of ICOs, which between 2017 and 2018 experienced their highest point, raising capital for more than US$6.3 billion in the first quarter of 2018, equivalent to 118% of all the capital raised in 2017. Many of them planned to build their products on the Ethereum blockchain network. As a result, Ethereum built up a wide network of developers interested in seeing their ERC-20 token gain wide recognition as an industry standard.
But in its early days, not everything worked out well on Ethereum. The original network launched in July 2015 was hacked and the Ethereum Foundation created a new version of the mainnet in July 2016, with an irregular state change implemented, which erased the theft from the history of the Ethereum blockchain. Since that event the ETH coin exists and the previous and unchanged version of Ethereum was renamed and continued as Ethereum Classic (ETC ticket). The story is well told in the book “Out of the Ether” by Matthew Leising.
The increase in the market value of Bitcoin in 2021 ($63,614 per Bitcoin in April) fueled the market, generating an increase in business associated with startups with developments in blockchain, as reported by PitchBook, with more than 72 DeFi companies financed with private capital this year.
For a better understanding of the DeFi concept, let’s review a very successful project (there are many others) and that has to do with the stock market business. We are referring to Uniswap, a decentralized protocol for the provision of automated liquidity on Ethereum (Uniswap.org). They are also known as DEX (Decentralized Exchange) that uses “liquidity pools” (LPs) to trade through an AMM (Automated Market Maker). Does it sound complicated? Sorry, this is a major change from the classic “order book” of a traditional exchange.
It is used to exchange an ERC-20 token from the Ethereum network for another (“swaps” or exchanges, hence its name). It was created in August 2018 by Hayden Adams, a project financed with US $100 thousand from the Ethereum Foundation, which was launched in November of that year. Like most initiatives of this type, it is open source that we can consult on Github (github.com/Uniswap).
Uniswap owns its own token, the UNI (at the time of writing this blog it is trading at US$21.63 per UNI. On January 1, 2021 it was trading at US$4.74 — reference messari.io/asset/uniswap) and grants its holders governance rights. This means that UNI holders can decide by vote what changes to apply to the protocol. 1,000 million UNI have been issued since the Uniswap clone software start of the project, which will enter into circulation within the next 4 years from the start of the operation, as indicated below:
60.00% for members of the Uniswap community: 600,000,000 UNI.
21,266% for founding members and employees with 4-year vesting: 212,660,000 UNI.
18,044% for investors with 4-year vesting: 180,440,000 UNI.
0.69% for advisors with 4-year vesting: 6,900,000 UNI.
In addition, a perpetual inflation of 2% per year has been considered, starting after the fourth year, ensuring continued participation and contribution to Uniswap with the help of passive UNI holders.
We will explain in general terms how Uniswap works. The first thing is that it does not work like traditional exchanges in the sense of creating a centralized order book. It uses a design known as the “Constant Product Market Maker”, which is a variant of the AMM model. AMMs are smart contracts that contain liquidity pools where traders can trade. The reserves are financed by the liquidity providers (market maker). Anyone can act as a liquidity provider, depositing the equivalent value of two tokens in a reserve. In exchange, traders will pay a commission to the pool, which will then be distributed to liquidity providers based on their share of the pool.
Liquidity providers create a market by depositing an equivalent value of two tokens, which can be ETH and one ERC-20 token, or two ERC-20 tokens. The reserves are made up of “stablecoins” (a cryptocurrency created with the purpose of maintaining a price with little variation in the market, generally representing a fiat currency within a blockchain) such as DAI, USDC or USDT, not being an essential requirement. In exchange, liquidity providers receive “liquidity tokens”, which represent their share of the total liquidity reserve.