Cryptokoin.com – Decentralized exchanges; It solves many of the problems of its counterparts, including hacking risk, mismanagement, and arbitrary fees. However, decentralized exchanges also have their own problems – mainly a lack of liquidity. This means a lack of money being processed around an exchange which makes trading faster and more efficient. This is where Uniswap comes into play. The exchange seeks to solve the liquidity problem of the decentralized exchange by allowing it to trade tokens without relying on the buyers and sellers who create that liquidity.
In this article, you can learn how Uniswap works and has become one of the most popular decentralized exchanges on Ethereum.
What is Uniswap?
Uniswap is an Ethereum protocol for exchanging ERC20 tokens. Unlike most exchanges that are designed to charge fees, Uniswap is designed to function as a publicly traded product. It is a tool for community tokens without platform fees or intermediaries. Also, unlike most exchanges that match buyers and sellers to set prices and trade, Uniswap uses a simple mathematical equation, token pools and ETH to do the same job.
Who designed Uniswap?
Uniswap was created by Hayden Adams, inspired by a post by Ethereum founder Vitalik Buterin.
Why is Uniswap so special?
The main difference of Uniswap from other decentralized exchanges is the use of a pricing mechanism called the “Fixed Goods Market Maker Model”.
Any token can be added by funding it with an ETH equivalent to Uniswap and the traded ERC20 token. For example, if you want to exchange for an altcoin named Poop Token, it will initiate a new Uniswap smart contract for the Poop Token. Thus, you create a liquidity pool with a $10 Poop Token and $10 worth of ETH.
Where Uniswap is different is that instead of connecting buyers and sellers to determine the price of the Poop Token, it uses a fixed equation: x * y = k.
In the equation, x and y represent the amount of ETH and ERC20 tokens in a liquidity pool, and k is a fixed value. This equation uses ETH and ERC20 tokens and the balance between supply and demand to determine the price of a particular token. When someone buys Poop Token with ETH, the supply of ETH increases while the supply of Poop Token decreases – the price of Poop Token increases.
As a result, the price of tokens on Uniswap can only change if trading takes place. Essentially, what Uniswap does is balance the value of tokens and trade them based on how much people want to buy and sell.
What else is different?
Absolutely any ERC20 token can be listed on Uniswap – no permission required. Each token has its own smart contract and liquidity pool – it can easily be created if one doesn’t exist. When a token has its own exchange smart contract and liquidity pool, everyone earns a liquidity provider fee of 0.3%; The token can be traded or contribute to the liquidity pool.
To contribute to a liquidity pool, you need ETH and ERC20 tokens of equal value.
How are Uniswap tokens generated?
When new ETH / ERC20 tokens are added to a Uniswap liquidity pool, the participant receives a “pool token”, which is also an ERC20 token. Pool tokens are created when funds are deposited into the pool and, as an ERC20 token, pool tokens can be freely traded, moved and used in other dApps. Pool tokens are burned or destroyed when funds are withdrawn. Each pool token represents a user’s share of the pool’s total assets and the pool’s 0.3% transaction fee share.
What can be done with Uniswap?
The Uniswap protocol is available at uniswap.exchange. Then, anyone with an Ethereum wallet like MetaMask can trade tokens or add tokens to the Uniswap liquidity pool.
What will happen in the future?
Since Uniswap is an open protocol of smart contracts, anyone can create a front-end UI on it. For example, InstaDapp allows you to add funds to Uniswap pools without having to access the official Uniswap user interface. New interfaces like DeFiZap allow users to add funds to Uniswap pools using only ETH. The interface offers simple, one-click solutions for purchasing pool tokens along with bZx token strategies.
At this pace, the coming years could see much more integration between Uniswap’s unique token swap system and new DeFi products.
Contact us to be instantly informed about the last minute developments. twitter‘also follow and Telegram join our channel!
Disclaimer: The articles and articles on Kriptokoin.com do not constitute investment advice. Cryptokoin.com does not recommend buying or selling any cryptocurrencies or digital assets, nor is Kriptokoin.com an investment advisor. For this reason, Kriptokoin.com and the authors of the articles on the site cannot be held responsible for your investment decisions. Readers should do their own research before taking any action regarding the company, asset or service in this article.
Warning: Citing the news content of Kriptokoin.com and quoting by giving a link is subject to the permission of Kriptokoin.com. No content on the site can be copied, reproduced or published on any platform without permission. Legal action will be taken against those who use the code, design, text, graphics and all other content of Kriptokoin.com in violation of intellectual property law and relevant legislation.