1. The Origin of Uniswap
Uniswap is one of the largest decentralized exchanges in the crypto space, built on the Ethereum platform, founded by Hayden Adams in 2018.
Uniswap provides the basic functions of an exchange, supporting the exchange of all ERC-20 tokens. It adopts an innovative Automated Market Maker (AMM) protocol, allowing users to trade cryptocurrencies without the need for a traditional order book or centralized intermediary, achieving a high degree of decentralization and censorship resistance. By encouraging liquidity providers to contribute cryptocurrencies and establish liquidity pools, users can trade directly in these liquidity pools without having to find buyers or sellers in the spot market.
Uniswap also has its own governance token, UNI. UNI holders can participate in the governance of the Uniswap protocol by proposing and voting on platform changes. Uniswap V3 is the latest version of the protocol, launched in May 2021, and introduced new features such as concentrated liquidity and multiple fee tiers.
Recently, Uniswap has launched its own Layer 2 - Unichain.
2. The Development History of Uniswap
The AMM design of Uniswap can be traced back to an article posted by Ethereum founder Vitalik Buterin on Reddit in October 2016, which proposed a prototype of a decentralized exchange based on blockchain. At the end of 2017, Uniswap's founder Hayden Adams began to develop Uniswap according to Vitalik's vision, although he had only been learning smart contract development for two months at the time. In August 2018, Uniswap received $100,000 in funding support from the Ethereum Foundation, and launched the Uniswap v1 version in November. In May 2020, the Uniswap team launched the v2 version, and the v3 version was released in May 2021, with the latest v4 version expected to be launched by the end of this year.
The various versions of Uniswap have been continuously iterated and the functionality has been gradually enriched: Uniswap v1: only supports ERC-20 ↔ ETH pools; Uniswap v2: supports ERC-20 ↔ ERC-20 trading and introduces the Flash Swap feature; Uniswap v3: The v3 version has made a lot of innovations in areas such as liquidity, fee tiers, and oracle functionality, significantly improving the capital efficiency of LPs, such as launching the concentrated market making function, and also has selectable fee tiers; Uniswap v4: expected to be launched by the end of this year, bringing more innovative features.
3. The Operating Principle of Uniswap
Uniswap uses the Automated Market Maker (AMM) protocol to facilitate trades without the need for intermediaries to match buyers and sellers. The transaction fee is distributed as a reward to the liquidity providers (LPs), allowing users to earn fees and other rewards by providing liquidity. The specific operating mechanism includes the following aspects:
Liquidity Providers: Users who deposit cryptocurrencies into the AMM, they earn interest and other returns by providing liquidity for trades. As a reward, liquidity providers receive liquidity provider tokens.
Liquidity Pools: Pools composed of two cryptocurrencies, such as ETH and USDT. These pools allow users to trade without the need to match buyers and sellers.
Automated Market Maker (AMM): A smart contract design that maintains the exchange function without order books. The AMM uses mathematical formulas to price assets, and liquidity providers provide funding for the pools by depositing two tokens, and anyone can become a liquidity provider.
3.1 How Token Prices are Determined
Uniswap uses an Automated Market Maker (AMM) system to determine the price of each token. This alternative way of adjusting asset prices based on asset reserves uses a long-standing mathematical equation. It works by increasing and decreasing token prices based on the ratio of tokens in the corresponding pool.
Whenever a user adds a new ERC-20 token to Uniswap, the user must add a certain amount of the selected ERC-20 token and an equal amount of another ERC-20 token to initialize the liquidity pool.
The size of the liquidity pool also determines the magnitude of price changes during the trading process. The more funds (i.e. liquidity) in the pool, the easier it is to execute larger trades without causing a significant price drop.
3.2 Arbitrage
Arbitrage traders play a crucial role in the Uniswap ecosystem. These traders specifically look for price differences between multiple exchanges and profit from these differences. On Uniswap, arbitrage traders will find tokens that are trading at prices higher or lower than the average market price and buy or sell accordingly. They will continue to do this until the token price is rebalanced with the prices on other exchanges.
4. Advantages and Disadvantages of Uniswap
Advantages
- Privacy Protection: Uniswap does not require users to go through KYC (identity verification), so users do not need to provide personal information, greatly ensuring privacy and security.
- Low Barrier to Entry: Anyone can issue tokens on Uniswap, the process is simple and does not require a lengthy review process.
- Asset Security: Users trade through their own wallets and private keys, reducing the security risks that may be faced on centralized exchanges, better protecting personal assets.
Disadvantages
- Limited Price Control: Unlike traditional order-matching systems, Uniswap's trading model does not allow users to fully control the execution price of tokens, and is more affected by market volatility.
- Higher Transaction Fees: Uniswap's transaction fees are generally higher than centralized exchanges, especially for users who trade frequently, who may bear higher costs.
- Fake Token Risk: Since Uniswap does not have strict review of tokens listed, there may be fake tokens or scam projects, and users need to invest cautiously.
- Smart Contract Risk: Uniswap relies on smart contracts to operate, and although it is decentralized, smart contracts are still at risk of hacking attacks, which could lead to asset loss.
Uniswap V4
One of the biggest innovations in the V4 version is Hooks. Hooks are contracts that run at various points in the lifecycle of a liquidity pool operation, which can be understood as a plugin.
Through Hooks, V4 has greatly improved the flexibility and composability of the protocol, giving users a larger operating space. Specifically, it allows each liquidity pool (e.g. ETH-USDT) to have a lifecycle, and within the lifecycle of a pool, the operations that may occur include:
Creating the pool;
Adding liquidity;
Removing liquidity;
Before a swap transaction;
After a swap transaction.
......
In the V3 version, these operations within the lifecycle were tightly coupled and executed in a strict order, i.e. many operations were encapsulated, and the user's operating space was very limited. But with the introduction of the Hooks concept in V4, the key functional nodes have been modularized and exposed to users, giving them more functionality.
In other words, the operations within a lifecycle have been split according to some key functional nodes, so that whether it is a liquidity provider or a trader, the granularity of the operations is finer, and there is more operating space, allowing users to customize and combine more practical functions.
In terms of transaction fees, for example, if we set a static fee in the hooks, the system will deduct the gas fee from the transaction at a pre-set fixed rate. If a dynamic fee is set, the system will flexibly adjust and deduct the corresponding fee based on the current market conditions. In addition to fees, Hooks can also mount different types of orders, making the transaction parameters more diverse.
This change provides more flexibility and customization options for trading. For example, in earlier versions, the trading environment was more like a closed iOS system, where developers and traders could only operate within a limited framework. But in the V4 version, the situation is more like an open Android system - developers and traders can use more functions to customize and optimize their operations. Therefore, both developers and users have more choices and autonomy, and personalized needs will be more easily met.
5. Unichain
Unichain is an L2 network designed for efficient market optimization. According to the official whitepaper, Unichain provides fast state updates, an internalized MEV (Maximum Extractable Value) framework, and an economic finality system to support fast cross-chain settlement. The core highlights of Unichain are its MEV framework and fast settlement capabilities, while also strengthening the role of the UNI token within it. Unichain adopts a new block construction protocol - Verifiable Block Building, compressing the block generation time to 200-250 milliseconds, and improving on-chain efficiency by separating the roles of block builders and sequencers. The introduction of a Trusted Execution Environment (TEE) further ensures the reliability and user experience of transactions, significantly reducing the probability of transaction failures.
The launch of Unichain has clearly empowered the UNI token in a new way. According to the whitepaper, Unichain has introduced a decentralized verification network, where users can become Unichain validators by staking UNI tokens on the Ethereum mainnet. The amount of UNI staked will directly determine the weight and potential rewards of the validators, who need to sign the legality of blocks and publicly disclose the signing results periodically to ensure network transparency.
This mechanism has expanded the role of UNI tokens from a simple governance token to actual network operation. After users stake UNI tokens, they not only can receive potential rewards, but also directly participate in the governance and operation of Unichain. Although the official has not yet revealed the specific reward mechanism, based on the existing information, the rewards may come from the network's Gas fees or MEV earnings. This undoubtedly endows the UNI token with more practical application scenarios and market value.
6. UNI Token
UNI is the native token of Uniswap, and also its platform token. Although Uniswap did not initially plan to issue a platform token, in September 2020, facing the pressure from the competitor SushiSwap attracting users through the SUSHI airdrop, Uniswap launched the UNI token.
UNI is essentially a platform and governance token. UNI holders can enjoy more rights and benefits, such as participating in liquidity mining (including creating and adding liquidity) to receive rewards, participating in proposals and voting to participate in DAO governance, and having the opportunity to receive irregular airdrop rewards.
When the UNI token was launched in September 2020, Uniswap airdropped 400 UNI tokens to users who had made transactions before September 1, 2020. The total amount of this airdrop was 150 million UNI, and about 66 million tokens were claimed within the first 24 hours after the airdrop. After distributing 40% of the tokens in the first year, the distribution will be reduced by 10 percentage points each subsequent year until all tokens are distributed. The total supply of UNI is 1 billion, which will be gradually released within four years, and the long-term inflation rate thereafter will be 2%. The initial distribution of UNI tokens is as follows: 60% to Uniswap community users, 21.51% to team members, 17.8% to founders, and 0.69% to advisors.
7. UNI Market Performance
During the past week when Uniswap announced the launch of Unichain, the UNI token has shown a significant momentum, surging 7.51%, and soaring 20.98% in the past month, indicating high investor interest and participation.
In addition, the number of transactions has increased by 1.6%, with 1.691 million transactions processed during the same period. Therefore, the increase in active addresses and trading volume indicates a healthy and active user base, which can support sustained growth.
Summary
The introduction of the Uniswap V4 version marks an important turning point in the decentralized finance (DeFi) field. Its core innovative Hooks mechanism has greatly improved the flexibility and composability of the protocol. By inserting modular operations at different stages of the liquidity pool lifecycle, Uniswap V4 has greatly expanded the operating space and customization capabilities for users. Compared to the strictly closed operating structure of V3, the launch of V4 is similar to the transition from the closed Apple iOS system to the open Android system, providing developers and users with more diverse functions and choices. This technological transformation not only brings more granular operational control to liquidity providers, but also allows traders to flexibly customize transaction parameters, such as dynamic or static transaction fees, to achieve personalized trading experiences. This high degree of customization capability meets the complex needs of different users, greatly promoting the applicability and extensibility of the protocol.
At the same time, Uniswap's Layer 2 network Unichain further consolidates its technological leadership. Unichain focuses on optimizing efficient markets, through the MEV framework, fast settlement, and a unique block construction protocol, compressing the block generation time to 200-250 milliseconds, significantly improving on-chain efficiency and user experience. The introduction of the Trusted Execution Environment (TEE) enhances the reliability of transactions and reduces the risk of failures. All of this not only provides users with a safer and more efficient trading experience, but also injects new practical scenarios into the UNI token, transforming it from a governance token to a core role in network operation and consensus. By staking UNI tokens, users can become Unichain validators and directly participate in the network consensus mechanism, earning Gas fees and MEV rewards, which undoubtedly expands the application value of the UNI token.
Against this backdrop, the market performance of the UNI token has also received a strong boost. Since the announcement of Unichain, the UNI token has not only performed well in terms of price, but has also shown a healthy growth trend in the number of transactions and active addresses. This growth indicates that as Uniswap's technology continues to innovate, the confidence and participation of its user base has significantly improved, supporting the platform's continued expansion and development potential.
In summary, the launch of Uniswap V4 and Unichain is not only an upgrade at the technical level, but also a major progress in the DeFi ecosystem in terms of flexibility, security, and user experience. Through these innovations, Uniswap not only provides developers with a broader customization development space, but also enables ordinary users to gain more autonomy and better experiences in participating in liquidity provision and trading. At the same time, the expansion of the role of the UNI token and the improvement of its market performance further consolidate Uniswap's position as a leader in the DeFi field.
Disclaimer:
The content of this article is for reference only and does not constitute any form of investment advice. Cryptocurrency asset prices fluctuate greatly, and investing involves high risks. Please fully understand the relevant risks before making investment decisions, and make independent judgments based on your financial situation and investment objectives. The author and the platform are not responsible for any investment losses caused by the content of this article.
