In September 2020, Uniswap gave out 400 UNI tokens to each cryptocurrency wallet thatâ€™s ever interacted with its platform. At the time, the airdrop was worth about $800, and it made big news in the cryptocurrency industry. For those who held their free UNI tokens, their 400 UNI tokens are now worth more than $8,000. Now thatâ€™s a nice stimulus check.
Uniswap has grown with the Decentralized Finance (DeFi) industry through early 2021. Itâ€™s the leading exchange on Ethereumâ€™s network, and investors have staked over a billion dollars in cryptocurrency on the platform. UNI tokens are used to vote on upgrades to the protocol, and investors can stake their UNI tokens for liquidity to earn interest on their investment.
What is Uniswap?
Uniswap is a decentralized exchange built on Ethereumâ€™s blockchain. Decentralized exchanges (DEXs) let investors swap cryptocurrency without needing to make an account with a centralized cryptocurrency exchange like Coinbase or Binance. The platform transacts north of a billion dollars in cryptocurrency on a daily basis, and itâ€™s the most used decentralized exchange in the world.
The Uniswap token is an ERC-20 token, meaning that it uses Ethereumâ€™s blockchain to process transactions instead of having its own network. Many cryptocurrencies use Ethereumâ€™s blockchain, including most non-fungible tokens (NFTs). The main advantage of Ethereum over Bitcoin is its smart contract technology. Smart contracts enable developers to make valuable protocols on Ethereumâ€™s blockchain, such as Uniswap.
Uniswap Smart Contracts
Essentially, Uniswap is just a bunch of smart contracts that work together to make a decentralized exchange. Smart contracts are code thatâ€™s uploaded to the blockchain, and since it’s on the blockchain, the code has the same immutible, decentralized and borderless capabilities that cryptocurrencies have. Smart contracts are capable of transferring money autonomously based on the parameters in the code, allowing for extremely efficient financial services.
Letâ€™s take a look at how a Uniswap smart contract works. Investors send their cryptocurrency funds to a Uniswap smart contract to earn interest on their holdings; these investors are referred to as liquidity providers, and the smart contracts that hold their cryptocurrency are called liquidity pools. Liquidity providers are necessary for Uniswap to operate, as itâ€™s how the platform is able to provide liquidity for investors.
Instead of order books, the smart contract calculates the price of each crypto asset. Since each liquidity pool has an equal value of each crypto asset, say Ethereum and DAI, the code calculates the price of each asset using the constant product formula X*Y=K, where K is the total amount of funds (denominated in USD) in the pool and X and Y are the amount of cryptocurrency tokens in the liquidity pool. These liquidity pools will readjust their token holdings continuously in order to preserve a 50-50 balance of each asset in the liquidity pool.
Advantages of Decentralized Exchanges
There are many benefits of using Uniswap over traditional cryptocurrency exchanges. Investors who use Uniswap can swap their cryptocurrencies directly from their Ethereum wallets, so thereâ€™s no need for the exchange to have custody over their funds. This significantly lowers the risk of being hacked, adding a layer of security that centralized exchanges canâ€™t achieve. Moreover, investors donâ€™t need to make an account to use Uniswap, allowing them to trade cryptocurrencies anonymously.
Since Uniswap is decentralized, no single entity controls the exchange. After popular stock brokerages like Robinhood and WeBull halted trading of Gamestop (GME) after its recent price surge, more attention has been paid to Uniswap, as nobody can halt the trading of assets. This is because no one entity controls the exchange.
Unbeknownst to most investors, there are ways to trade many different assets on Uniswap. Ethereum projects that have tokenized precious metals like gold and silver are available on Uniswap, and Mirror Protocol tokenizes stocks like Apple, Tesla and Google that can be traded on DEXs. Due to regulation, however, the Uniswap team has delisted some synthetic stocks from its front-end interface. Users can still trade these tokenized stocks through other interfaces; the protocol remains unchanged.
Providing Liquidity on Uniswap
Investors can choose to stake their Ethereum tokens on Uniswap to earn interest on their investment. Ethereum tokens include Ether, Ethereumâ€™s native token, but it also includes ERC-20 tokens, such as Aave, DAI, Wrapped Bitcoin, and ChainLink. When investors provide liquidity on Uniswap V2, they need to provide equal amounts of Ether tokens and an ERC-20 token to enter the liquidity pool. However, with concentrated liquidity in Uniswap V3, users can deposit unequal amounts of 2 crypto assets.
To keep an equal value of each crypto asset, the smart contract rebalances the amount of Ethereum tokens and ERC-20 tokens in the liquidity pool when the price of one of the tokens changes. Albeit a small difference, if one token goes up while the other stays the same then youâ€™d be better off just holding each token separately â€“â€“ a concept known as impermanent loss.
As of May 5th, Uniswap launched UNI V3. The biggest upgrade in Uniswap V3 is called concentrated liquidity, and Uniswap has the exclusive rights to use this function for the next 2 years, giving them a large advantage over its competitors. Concentrated liquidity uses non-fungible tokens (NFTs) to let investors set a specified range of prices to provide liquidity in.
For example, an investor can concentrate their liquidity so their funds are only used in the ETH-DAI pool for when Ethereum tokens are between $1500 and $2500. Uniswap V2 liquidity providers have to cover all price ranges from $0 to infinity, which isnâ€™t an efficient allocation of their staked funds. This is especially the case for stablecoins, as stablecoins rarely move more than 1% in either direction before returning to their average price of $1.
Uniswap expects that investors can earn much more interest by providing concentrated liquidity, and you can see the interest rates you can earn on Uniswap V2 compared to Uniswap V3 on Uniswapâ€™s website.
Is Uniswap Safe?
Uniswapâ€™s exchange is regarded as one of the most secure ways to exchange cryptocurrencies. Since Uniswap interacts directly with your Ethereum wallet, a hacker would need to breach your crypto wallet, as your funds arenâ€™t held by the exchange. Since centralized exchanges hold custody of your cryptocurrency, theyâ€™re much larger targets for cryptocurrency hackers. If a hacker can breach an exchangeâ€™s security, theyâ€™d be able to access a much larger pool of funds than if they were to hack any individual cryptocurrency wallet.
In regards to UNI token, there’s an inherent risk of losing money just like any other investment. Cryptocurrencies, especially altcoins, are high risk investments. This being said, early investors in Uniswap have seen huge returns on their investment.
Some speculators argue that Uniswap is still undervalued, as they only have about 12 employees, yet the company has similar transaction volumes to Coinbase. Uniswapâ€™s market capitalization is sitting at $16.7 billion, while Coinbase has a market cap of over $60 billion. Of course, there is more than just transaction volume that affects the valuation of these exchanges, but itâ€™s an interesting statistic nonetheless.
Where to Invest in Uniswap
The 2 most popular centralized exchanges that support Uniswap token are eToro and Coinbase. Making an account with either of these exchanges is an easy process; you just need to enter your email address and create a password. Once youâ€™ve made an account, youâ€™ll need to verify your identity. Exchanges typically require you to provide a photo of your driverâ€™s license, your Social Security number, home address and date of birth.
Alternatively, you can use Uniswapâ€™s exchange to invest in UNI token. To use the platform, all you need to do is connect your Ethereum wallet to Uniswapâ€™s website. The most popular Ethereum wallet investors use for Uniswap is Metamask, as its Google Chrome extension makes it easy to use with blockchain protocols like Uniswap.
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Coinbase is one of the Internetâ€™s largest cryptocurrency trading platforms. From Bitcoin to Litecoin or Basic Attention Token to Chainlink, Coinbase makes it exceptionally simple to buy and sell major cryptocurrency pairs.Â
You can even earn cryptocurrency rewards through Coinbaseâ€™s unique Coinbase Earn feature. More advanced traders will love the Coinbase Pro platform, which offers more order types and enhanced functionality.
Though Coinbase doesnâ€™t offer the most affordable pricing or the lowest fees, its simple platform is easy enough for complete beginners to master in as little as a single trade.
- New cryptocurrency traders
- Cryptocurrency traders interested in major pairs
- Cryptocurrency traders interested in a simple platform
- Simple platform is easy to operate
- Comprehensive mobile app mirrors desktop functionality
- Coinbase Earn feature rewards you with crypto for learning about available coins
- Higher fees than competitors
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Gemini is a cryptocurrency exchangeÂ and custodian that offers investors access to 26 coins and tokens. Founded in the US, Gemini is expanding globally, in particular into Europe and Asia. Offerings include both major cryptocurrency projects like Bitcoin and Ethereum, and smaller altcoins like Orchid and 0x.
Gemini is 1 of the only brokers with multiple platform options based on skill level. New investors will love the streamlined interface of Geminiâ€™s mobile and web apps, while advanced investors might appreciate all the tools that come with ActiveTrader.Â
In addition to a host of platform choices, Gemini users also have access to insured hot wallets to store tokens without worrying about digital asset theft. Learn more about what Gemini can do for you in our review.
- New investors looking for a simple mobile and web app
- Experienced investors who need a more advanced platform with more tools
- Users looking for a 1-stop-shop to buy, sell and store all of their coins
- Easy and quick signups â€” can get started in as little as a few minutes
- Multitude of platforms to accommodate traders of all skill levels
- Hot wallets include insurance to protect your from theft and hacking attempts
- Charges both a commission and a convenience fee for users buying and selling through the desktop or mobile app
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eToro, headquartered in Cyprus, England and Israel, has provided forex products and other CFD derivatives to retail clients since 2007. A major eToro plus is its social trading operations, including OpenBook, which allows new clients to copy trade the platformâ€™s best performers. Its social trading features are top notch, but eToro loses points for its lack of tradable currency pairs and underwhelming research and customer service features
- U.S. based cryptocurrency traders
- Social and copy traders
- Simple user interface
- Community engagement and following other traders
- 25 cryptocurrencies
- Expansive network of social trading features
- Large client base for new traders to imitate
- U.S. traders can only buy cryptocurrency
DeFi Price Movements
Decentralized finance tokens are among the most hyped assets in the cryptocurrency community today â€“â€“ for good reason. Investors speculate that DeFi will be used as an alternative for those who don’t have access to banks. Moreover, DeFi platforms are extremely efficient. While traditional banks and exchanges employ hundreds if not thousands of people, DeFi only needs a few employees to serve the same function, as smart contracts do much of the work autonomously.
If you believe in the decentralized finance industry, Uniswap may be a great addition to your portfolio. Not only is it the most liquid decentralized exchange, but Uniswapâ€™s V3 upgrade makes cryptocurrency on the platform even more liquid. While Uniswapâ€™s other upgrades could be used by other DEXs, its V3 upgrade is protected for 2 years, giving Uniswap a huge competitive advantage over other decentralized exchanges.
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