Uniswap is the market-leading decentralized exchange (DEX). Uniswap has also cemented its position as one of the top 20 cryptocurrencies. This is a Uniswap beginner’s guide. We’ll walk you through the history and technology of Uniswap and analyze the UNI token as an investment.
Please note, that this is not a user guide on how to use Uniswap. You’ll find that information here. This article is made for those interested in Uniswap (UNI) as an investment.
Uniswap is a DeFi token
Let’s place Uniswap into the correct cryptocurrency category. We like to use three main categories: currencies, platforms, and tokens.
The currency category has coins built for the purpose of P2P digital money. Bitcoin is the most famous one. Other currencies include Litecoin, Bitcoin Cash, and Dash.
Platforms are operating systems for distributed apps (Dapps). You can compare them to iOS and Android. Ethereum is the market leader in this category. Cardano, Binance Chain, and Polkadot are other famous platforms.
Tokens are issued on these platforms, which means they utilize an existing blockchain. Tokens are either utility tokens or governance tokens. They have a specialized use case related to a certain Dapp. Chainlink is probably the most famous token.
Uniswap is also a token. We can place it into a sub-category called DeFi (Decentralized Finance). There are two popular types of DeFi Dapps: decentralized exchanges (Uniswap, PancakeSwap) and liquidity protocols (Aave, Compound).
The native token of Uniswap is also called Uniswap. Hence, this word can refer to the token or the DeFi application. The ticker is UNI. It is an ERC-20 token, meaning UNI was issued on the Ethereum platform.
The UNI token is a governance token like almost every other DeFi token. You don’t need the UNI token to use the Uniswap exchange. The purpose of UNI is purely to govern the protocol.
Uniswap was born as one man’s project
Uniswap was created by an American called Hayden Adams. The story of Uniswap differs from many other cryptocurrencies since it started as a one-man project. Typically, there is a fintech company, VCs, and a bunch of software developers running a new project.
You’ll find the detailed Uniswap history from this blog post.
Hayden Adams learned Solidiy quickly and wanted to have a proper challenge. This is the reason he started to develop an Automated Market Maker (AMM) model based on Vitalik Buterin’s earlier idea.
In November 2017, Adams launched the Proof-of-Concept of Uniswap. See the picture below.
Some people might think that Adams is the father of decentralized exchanges. This is not correct. EtherDelta DEX was already running back then, but it wasn’t very popular. In 2018, the project got into deeper problems with regulators and dissolved.
Adams didn’t invent the AMM model either, as it’s told in the blog post of Uniswap history. Adams did, however, build the first AMM-based DEX which reached significant popularity. Now there are dozens of similar exchanges in the market. Many of them are Uniswap clones.
The first proper demo version of Uniswap was published in the spring of 2018. This is the year when Adams finally met Vitalik Buterin, the founder of Ethereum. Networking in the Ethereum community helped Adams to get people to help him with the development.
In the beginning, Adams built Uniswap using his own money for about a year.
The official launch of Uniswap took place in November 2018. This was at the bottom of the bear market. New projects didn’t get much media attention if any.
— Hayden Adams 🦄 (@haydenzadams) November 2, 2018
The whole crypto industry was quiet and the DeFi scene barely existed. If you missed Uniswap’s launch, you weren’t the only one.
By the way, the name Uniswap comes from Vitalik Buterin. When he heard the first proposal Unipeg (Unicorn + Pegasus), Buterin allegedly said: “Unipeg? It sounds more like Uniswap.”.
The DeFi boom and UNI token
Even if Uniswap was developed hard in 2019, barely anyone knew about it. This is because the whole DeFi sector was so young and didn’t get any media attention. Eventually, Uniswap “broke the bank” in the summer of 2020 with other DeFi projects, such as Compound, Aave, and Yearn Finance.
In May of 2020, the Uniswap V2 was launched. This was a major technical milestone. The project also secured 11 million dollars of funding around this time. By 2020, Uniswap was a serious project with a proper team of developers.
The DeFi boom of 2020 also brought some unexpected issues. A rivaling DEX called SushiSwap launched a “vampire attack” and started to suck liquidity out of Uniswap. The vampire attack is described in detail in the video below.
In short, SushiSwap cloned Uniswap and launched their own SUSHI token. This was given as an added bonus for all liquidity providers. It was a problem because Uniswap didn’t have a token back then.
This attack led to the launch of the UNI token in September 2020. About 50,000 Ethereum addresses were airdropped 400 UNI tokens each. At the time, the value of each UNI token was around $5. It was a nice bonus of $2000 for people who had used the Uniswap exchange earlier.
For a few months, Uniswap gave UNI tokens as a liquidity bonus. Just like SushiSwap had done earlier. This is no longer the case. If you want to get UNI tokens, you need to purchase them from an exchange.
In May of 2021, the Uniswap V3 was launched. It included many improvements, which are claimed to provide capital efficiency up to 4000x relative to V2.
The Uniswap exchange
Some newbies might think the UNI token is needed to use the Uniswap exchange. This is not true. The UNI token is only used in the Uniswap protocol governance. The end-user doesn’t have to buy it at any point.
The Uniswap exchange is extremely easy to use. As mentioned earlier, it’s a DEX (Decentralized Exchange). This means it’s a distributed app built on the Ethereum platform. It’s open for anyone to use, and you are always in full control of your funds.
All DeFi applications have the same basic principle. They are fully automatized, which means the end-user communicates with smart contracts by using a Web 3 wallet (MetaMask). There is no customer service or KYC, no human interactions of any kind.
See the image above. This is the interface of Uniswap exchange (V3) when using a standard web browser. The GUI hasn’t seen any major changes since V1. The end-user selects a token to sell and another token to buy (ETH -> DAI in this example). Detailed information about the swap can be found from the round (i) button.
The fees on Uniswap are just 0.3 percent. Hence it’s a very cheap exchange to use…in theory.
In practice, the situation is totally different. Since each trade is a communication between your wallet and a smart contract, there is an Ethereum network fee (gas) to be paid. These fees have risen from tens of dollars to over 100-dollar levels in 2020 and 2021.
The reason is the clogged Ethereum network. Ironically, this is caused by the popularity of Uniswap among other DeFi applications. All Ethereun dapps have this same issue with high fees. This means small investors can’t use Ethereum DeFi until version 2.0 or other scaling solutions are implemented.
If the network fees are low, Uniswap is very pleasant and fast to use. You are also fully in control of your tokens. They are never deposited to any third-party accounts.
The technology behind Uniswap
Let’s take a look under the hood. There are a couple of topics we must cover in order to understand how Uniswap works. These are AMM and liquidity pools.
Before Uniswap, decentralized exchanges faced a major issue. How to get liquidity? This means offers in the order book. If there is no one making the market and offering liquidity, people can’t make trades. Uniswap solved this problem by using AMM and liquidity pools.
Buyers and sellers at Uniswap are communicating with a smart contract, which is using an AMM. This automated market maker algorithm calculates a fair price based on the current market activity. There is no order book and no traditional bids or asks behind it.
But where are the tokens coming from? If you want to sell ETH for DAI, you need to get the DAI from somewhere. Also, your ETH can’t just disappear either. This is where liquidity pools are used. The following video explains this topic very well.
A liquidity pool is a pool of funds, which are deposited to the Uniswap exchange by liquidity providers (LP). A DEX like Uniswap attracts investors to deposit liquidity by offering them trading fees. Every time an end-user makes a trade, the fees are paid automatically to LPs.
Uniswap couldn’t function without liquidity pools. It’s also possible that liquidity pools aren’t big enough for some unknown tokens. If you want to buy 10 million dollars worth of a token ranked #1000 in the coin market, this cannot be done. Though, there wouldn’t be enough liquidity on a traditional exchange either.
There is also something called impermanent loss involved. You can learn more about it from this video. In short, it means there is a risk for the liquidity providers to lose money as well.
There are some technical differences in-between DEXes, but the basic concept is the same. They are decentralized apps built using smart contracts and liquidity pools.
UNI token as an investment
Let’s look at Uniswap and its UNI token as a potential investment.
As you might remember, the UNI token is not used in the Uniswap exchange. Transaction fees are always paid using ETH since it’s running on the Ethereum blockchain. Liquidity providers are also paid in the currency that’s being traded.
The UNI token is a governance token, like almost every other DeFi token as well. This means Uniswap is a DAO (Decentralized Autonomous Organization), but to a certain extent. There is a dedicated team and a fintech company developing the app, but users have a say in deciding where the protocol is headed.
Below is an example of a vote on Uniswap’s grants program.
The voting result is often close to unanimous. It’s also common that many UNI holders are not exercising their right to vote. In this example, only about one-fifth of the circulated tokens participated. If you hold your tokens in a cryptocurrency exchange, they can use your tokens to vote.
The value of a governance token should rise in parallel with the liquidity in the protocol. The more valuable Uniswap is, the more investors have the interest to hold UNI tokens and make sure the protocol develops in the right direction.
There is a significant difference between the use cases of governance and utility tokens. When the token is used to pay transaction fees, increased network activity adds to token demand.
Almost all platforms use also a Proof of Stake consensus algorithm these days. This means there is staking, which leads to the fact that tokens like ETH (Ethereum), ADA (Cardano), and BNB (Binance Coin) are hybrids. They have the utility case from network fees and the governance use case from staking.
If you invest in Uniswap, you must also look at the DeFi market. The following picture is from defillama.com.
This ranking list is changing every day, so don’t pay too much attention to the exact TVL value or ranking position. The point is, that there are half a dozen significant DEXes in the market. New protocols gain popularity on other platforms too, not just on Ethereum.
For example, PancakeSwap has become very popular among small investors. Since it runs on the Binance Smart Chain, PancakeSwap doesn’t have the same scaling issues as Ethereum. The volume on PancakeSwap is also impressive. Uniswap has become a playground of whales and pro investors.
A potential investor should pay close attention to the DeFi market development. The popularity of Uniswap is depending on the scaling solutions it will eventually use.
Uniswap price and how to buy Uniswap
Coinbase and Bitpanda are also popular options. They are more designed for newbies. If you are an inexperienced investor, you might like those exchanges more. Of course, you can also buy UNI from the Uniswap DEX!
Since Uniswap is an ERC-20 token, it can be stored on Ethereum wallets. Exodus is a popular option for a desktop or mobile wallet. TrustWallet is a great mobile wallet. Ledger Nano X offers ultimate safety.
The official website is uniswap.org. The Twitter handle is @uniswap, and the official Reddit threads can be found at /r/Uniswap. Follow these channels and you’ll stay up to date. We also recommend checking the following video of Uniswap.