Uniswap Exchange | Buy Rated Crypto Exchange | The Safest
Uniswap is a set of computer programs that run on the Ethereum blockchain and allow for decentralized token swaps. It works with the help of unicorns (as illustrated by their logo).
Traders can Uniswap exchange Ethereum tokens on Uniswap without having to trust anyone with their funds. Meanwhile, anyone can lend their crypto to special reserves called liquidity pools. In exchange for providing money to these pools, they earn fees.
How do these magical unicorns convert one token to the other? What do you need to use Uniswap? Let’s read on.
How does Uniswap work?
Uniswap leaves behind the traditional architecture of digital exchange in that it has no order book. It works with a design called Constant Product Market Maker, which is a variant of a model called Automated Market Maker (AMM).Automated market makers are smart contracts that hold liquidity reserves (or liquidity pools) that traders can trade against. These reserves are funded by liquidity providers. Anyone can be a liquidity provider who deposits an equivalent value of two tokens in the pool. In return, traders pay a fee to the pool that is then distributed to liquidity providers according to their share of the pool. Let’s dive into how this works in more detail.
Decentralized exchanges growing in importance
As the native token of the Uniswap decentralized exchange, UNI is a governance token. This allows owners of UNI to participate in decisions on how the network operates, as well as benefit from the rising value of decentralized exchanges over time. In essence, the value of UNI tokens correlates with the inherent value investors see with the Uniswap exchange. That’s important to consider for those looking at UNI as an investment.
Uniswap is growing quickly
As the global crypto ecosystem continues to get built out, it’s conceivable that decentralized crypto exchanges could see volumes explode. Indeed, the fact that the global crypto market has recently approximated $2 trillion (that’s a lot of capital) suggests the influx of new investors in the crypto space could continue.
Of course, transaction volumes are a key driver of the value of the Uniswap DEX as well as UNI token. Over recent 24-hour periods, Uniswap has facilitated an average of approximately $1.5 billion in transactions. That’s every day.
Uniswap LP tokens as NFTs
We now understand that each Uniswap LP position is unique since each depositor can set their own price range. This means that Uniswap LP positions are not fungible anymore. As a result, each LP position is now represented by a non-fungible token (NFT).One of the advantages of representing a Uniswap LP position with a fungible token was how it could be used in other parts of DeFi. Uniswap v2 LP tokens could be deposited into Aave or Maker DAO as collateral. This is no longer the case with v3 since each position is unique. However, this break of composability may be solved with new types of derivative products.
What is impermanent loss?
As we’ve discussed, liquidity providers earn fees for providing liquidity to traders who can swap between tokens. Is there anything else liquidity providers should be aware of? Yes. There’s an effect called impermanent loss.Let’s say that Alice deposits 1 ETH and 100 USDT in a Uniswap exchange pool. Since the token pair needs to be of equivalent value, this means that the price of ETH is 100 USDT. At the same time, there’s a total of 10 ETH and 1,000 USDT in the pool – the rest funded by other liquidity providers just like Alice. This means that Alice has a 10% share of the pool. Our total liquidity (k), in this case, is 10,000.