Uniswap is a decentralized exchange protocol built on the Ethereum blockchain that provides unattended trading of ERC-20 tokens. Its first version (Uniswap v1) has been live since November 2018 (launched at DevCon 4), while the second version (Uniswap v2) came out in May 2020.
In Uniswap, users can swap tokens, add tokens to a pool to earn fees, or list tokens without trusting any central intermediary. Since all interactions are done directly on-chain and therefore cost gas, Uniswap has become the most significant gas contributor on the Ethereum public network and the most widely used dApp to date. this moment.
Uniswap is built on a unique system called Automated Market Maker (AMM). At its core, the liquidity generated by the pools consists of two types of ERC-20 tokens. As a reward for providing liquidity, parties (Liquidity Providers or LPs) collect swap fees incurred whenever individuals swap tokens. In Uniswap v2, the swap fee is set at 0.3% of the nominally traded amount. The fees collected are allocated to the pool’s reserve. After the protocol swap, UNI holders will collect 0.05% per swap, while the LP reward will be reduced to 0.25%.
Although not the first AMM, Uniswap popularized the development of automated market-making protocols, leading to the creation of competing protocols such as SushiSwap, which relied heavily on a collection of source contracts. its audited open.
UNI is an ERC-20 token on the Ethereum blockchain that provides governance control of the Uniswap protocol, UNI token community treasury, protocol fee conversion (0.05% fee will be collected by UNI token holders if activated. ), eth ENS, default Uniswap token list (tokens.uniswap.eth) and SOCKS liquidity token.
1. How does Uniswap work?
1.1 An Automated Market Making DEX on Ethereum
Uniswap is an AMM decentralized exchange on the Ethereum blockchain. The Uniswap protocol is made up of a series of smart contracts containing pairs of tokens. These smart contracts allow users to exchange any ERC-20 token with each other.
In Uniswap, there are three main parties:
- Liquidity providers (LP) add assets to the Uniswap pool (reserve) and receive a liquid contribution called “Pool Tokens” as a clearing. They can create new pools, add liquidity to existing pools, and remove tokens from the reserves they contribute (by depositing LPs).
- Trader are individuals who want to exchange two tokens (e.g. buy KNC with USDT). They pay a swap fee, which is added to the reserve of KNC/USDT.
- Arbitrage trader track any price deviations with different trading times (e.g. Binance) to profit from this. This implements an efficient pricing mechanism at the pool level.
1.2 Dynamic pricing mechanism based on constant product function
Any party can earn commissions for contributing their tokens to the “liquidity pool”, ensuring tokens are available when needed for trading needs. A 0.3% fee is charged whenever a swap is made. LPs are parties that provide liquidity by adding tokens to a specific pool. As a bonus, they receive these fees based on how much they contribute to the pool.
Uniswap relies on a constant product function to determine the market price.
The formula is x * y = k, where x and y equal the pair reserve balance (e.g. BUSD and USDC) while k is a constant.
Fees are collected for each swap, increasing the constant k in the previous formula as after each transaction because they are “reinvested” directly into the reserve.
1.3 Differences with the orderbook model
Most exchanges operate on an orderbook model where the market price is determined by the highest bid price and lowest ask price. Other decentralized exchanges like Binance DEX, IDEX, and Loopring DEX are built on an orderbook model that closely matches the trading experience of popular centralized exchanges like Binance, Kraken, and Bitfinex.
In contrast, Uniswap uses liquidity pools, where the price is derived from the rate of another token in a pool. The system is similar to other crypto projects like Bancor and Kyber.
When a trader does a swap between two tokens (for example, selling 100 KNC to DAI), the reserve balance changes resulting in a new overall price. The price of tokens on Uniswap is checked by arbitrage. For example, if a token is overvalued, an arbitrageur can buy it and sell it for a profit on another exchange until the price is equalized.
1.4 Difference between Uniswap v1 and Uniswap v2
Uniswap v1 only accepts ERC-20 pools against ETH. As a result, only a single pool can be created per asset and has resulted in a dependence on the ETH price, which sometimes leads to temporary losses.
In Uniswap v2, multiple pools can be created like USDC/BUSD, DAI/KNC or DAI/ETH. The addition of unique pairs can result in fewer “trading hops” from the user’s perspective, ultimately improving price execution by reducing gas fees, liquidity fees, and slippage.
Uniswap v1 is designed to be censorship resistant and will always exist alongside Uniswap v2 since contracts have been deployed on the Ethereum blockchain without any possibility to revoke them.
Additional elements of Uniswap v2 include protocol switching (allowing UNI token holders to collect 0.05% swap fees compared to 0.25% for LPs), a new logical price oracle, fast swaps and change in contract structure. For more details, visit its official website.
2. Token Economy
2.1 UNI Token Offering
1 billion UNI tokens have been minted. This initial supply will be fully diluted over the next 4 years, with the allocation as follows.
- 60% for Uniswap community members / 600,000,000 UNI.
- 51% to pool members and prospective employees with 4 years gain / 215,101,000 UNI.
- 80% for investors with a term of 4 years / 178,000,000 UNI.
- 069% for advisors with a term of 4 years / 6,899,000 UNI
Distribution of the original UNI token supply (%)
As part of the UNI token launch, 60% of UNI’s initial supply has been allocated to community members. As of September 17, 2020, 1/4 of this supply (15% of the total initial supply) is distributed to reward former Uniswap users who can claim tokens directly on the management portal. treat. The rest will be made available through liquidity mining (“Profit Farming”) on four pre-selected pools: ETH/USDT, ETH/USDC, ETH/DAI, and ETH/WBTC. This liquidity mining will last for 3 months, from 2024 the supply will increase at an annual inflation rate of 2%.
2.2 Purposes of using tokens
UNI is an ERC-20 token on the Ethereum blockchain that aims to initiate and incentivize community participation through “shared community ownership and dynamic governance”.
After the initial delay of 30 days, control of the Uniswap vault will be transferred to the community. The community will be able to vote to “allocate UNI for grants, strategic partnerships, governance initiatives, additional liquidity mining pools, and other schemes.” While governance recommendations can change most protocols, some Uniswap redemption switch elements are hard-coded (at 0.05%). However, other factors such as the addition of more pools will be controlled by the community after the initial delay. To be accepted, an administrative proposal must meet the following conditions:
- 1% of UNI’s total supply (authorized) to submit a governance proposal.
- 4% of the UNI’s supply is required to vote “yes” in order to obtain a sufficient number of votes.
- Voting time 7 days.
- 2 days delay in implementation.
Notably, the Uniswap pool has stated their intention not to engage in protocol development, audits or “other matters”. Instead, the community will be fully responsible and even encouraged to “consult knowledgeable legal and regulatory professionals before making any specific recommendations.” “.
3. Project development team
4. Development activities
According to Binance Research
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