Most recent update: [June 26, 2023]
What Is Uniswap?
Uniswap is a protocol on Ethereum for swapping ERC20 tokens. Unlike most exchanges, which are designed to take fees, Uniswap is designed to function as a public good—a tool for the community to trade tokens without platform fees or middlemen. Also unlike most exchanges, which match buyers and sellers to determine prices and execute trades, Uniswap uses a simple math equation and pools of tokens and ETH to do the same job.
How Does Uniswap Work?
It makes use of Market Maker and Constant Product. This method is a version of the AMM (Automated Market Maker) prototype. AMMs are smart contracts that keep liquidity pools or reserves for dealers to trade with. Liquidity providers contribute to these pools. A liquidity provider is someone who lends an equivalent amount of two tokens in the pool. As a result, shops must pay a fee to the pool. This tax is subsequently distributed to liquidity providers in proportion to their pool participation. Two ERC-20 tokens or one ERC-20 and one ETH token can be used. Although stablecoins like USDC, DAI, and USDT are commonly used in these pools, this is not a rule. On the basis of their contribution to the pool, liquidity providers can recoup these liquidity tokens.
Token Price
Uniswap utilizes an automated market maker (AMM) to determine the token price. The AMM uses an equation, x*y=k, to work out the cost of the tokens. Token A is represented by x, and y represents token B. K is a constant value and does not change. The AMM increases or decreases a coin’s price depending on the ratio of coins in the pool.
Arbitrage Traders
These are a critical part of the Uniswap ecosystem. Arbitrage traders look for discrepancies in price across multiple trading platforms and make a profit through the price difference. For example, let’s take an example if a particular coin is trading for $100 in one trading platform and $120 in another trading platform. Arbitrage traders would buy the coin on the first trading platform and sell it on the second for $120.
On Uniswap, the arbitrage traders look for tokens that are trading above or below their market price. Why does the price discrepancy occur? Large trades generally tend to create an imbalance and impact the price. The traders buy or sell the tokens accordingly until the price matches the price on other trading platform. The equation between Uniswap’s automated market maker and arbitrage traders helps keep the price of the Uniswap token uniform.
History Of Uniswap
Uniswap was created as part of a plan to introduce AMM on the Ethereum blockchain. Ethereum developer Hayden Adams created it. Before Uniswap, Adams had worked on several projects in the Ethereum ecosystem. Uniswap was initially called Unipeg before Vitalik Buterin, the founder of Ethereum, suggested changing its name to Uniswap. Adams took inspiration from one of Vitalik Buterin’s blog posts and created the Uniswap protocol.
Supply Of UNI Tokens
The Uniswap governance token, the UNI, was launched in September 2020. The protocol airdropped 400 UNI to every wallet address that had interacted with Uniswap before a specific cutoff date (September 1). Initially, Uniswap released 150 million UNI tokens, out of which 66 million were claimed within the first 24 hours. The total number of Uniswap tokens will be 1 billion UNI, which will be released over four years. Out of this number, 60% of the tokens will be distributed to the Uniswap community, and a further 21.5% will be allocated to Uniswap employees, while the remaining 18.5% will be issued to investors and advisors of the project.
How Is Uniswap Secured?
The UNI token is an ERC-20 token based on Ethereum. It defines a set of rules for the tokens to follow and security considerations related to the Ethereum network. Congestion on the Ethereum network or a hike in the gas fees could lead to delays and significantly higher transaction fees.
UNI Risks
As with all crypto assets, there are general risks associated with UNI and the Crypto Contracts available on the VirgoCX Platform. For additional information on these risks, please refer to the VirgoCX Platform Risk Statement.
Economic Incentive Failure Risk
Uniswap’s only real economic parameter is the trading fee of 0.30% per trade. This is to encourage liquidity providers to place their funds in the liquidity pools so that traders can make use of the protocol. If this fee turns out to be too high or too low then it might change the level of funds in each pool and consequently the returns for liquidity providers, but it has no bearing on a liquidity providers capital.
Counterparty Risk
In terms of counterparty risk, liquidity tokens are fully decentralized with underlying assets held by the smart contract with the code being the law. The counterparty risk is the average of the counterparty risk of the underlying currencies.
Due Diligence
Prior to listing UNI on the VirgoCX Platform, VirgoCX performed due diligence on UNI and determined that UNI is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of UNI and/or its primary development team;
- The supply, demand, maturity and liquidity of UNI; and
- Legal and regulatory risks associated with UNI.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.
References
https://coinmarketcap.com/currencies/uniswap/
https://academy.binance.com/en/articles/what-is-uniswap-and-how-does-it-work
https://www.cityam.com/crypto-am-definitively-defis-guide-to-using-uniswap/
https://medium.com/nexus-mutual/understanding-risks-in-defi-1-uniswap-e5e790692635
https://docs.aave.com/risk/v/master/asset-risk/uniswap-market
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