Strengths and Weaknesses
- Everyone has access to the Uniswap platform and there is no registration required
- Using it does not require you to provide any personal information (KYC)
- UniSwap operates without the involvement of a third party (a number of intermediaries, financial institutions, and other institutions are excluded from trading on this platform)
- By providing liquidity, you can earn interest on your cryptocurrency holdings
- It is easy to use and has a clear interface
- All ERC-20 tokens are supported
- In addition, it has a license prohibiting competitors from copying the code for two years
- Liquidity providers are subject to impermanent loss
- Uniswap does not provide any insurance coverage in the event that you lose your cryptocurrencies due to a hacking attack
- Uniswap v3 may seem a bit challenging to cryptocurrency newcomers. If you are one of these individuals, please read the article Uniswap v3 - How to Start. You can also review our DeFi Tutorial to learn from the beginning how to get started with decentralized finance (DeFi).
Uniswap v3 is a non-custodial automated market maker (AMM) implemented for the Ethereum Virtual Machine (EVM), often referred to as a decentralized exchange (DEX). It was launched on the Ethereum mainnet on May 5, 2021. Uniswap v3 provides traders and liquidity providers with greater capital efficiency, better control and accuracy of oracles as well as a more flexible fee structure than previous versions of Uniswap v1 and v2.
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Functioning of the Protocols
Uniswap v3 is a DEX based, on the same principle as Uniswap v2, automated market makers (AMM). A variety of new features have been added to maximize returns, minimize slippage, and improve the management of risk.
With Uniswap v3, traders as well as liquidity providers will benefit from the combination of new features. Liquidity providers may increase the return on their capital by up to 4 000 times and better align potential risks. Furthermore, the developers have improved the security and decentralization of the protocol.
In more detail, we will review the following major updates:
- Concentrated liquidity
- New fee tiers
- Range limit orders
- Non-fungible liquidity
- Advanced oracles
A major feature of Uniswap v3 is the option to concentrate liquidity. In Uniswap v2, liquidity could only be provided evenly along the price curve. This was very inefficient for liquidity pool (LP) with stable assets as they could only trade in a very narrow range of prices. A $DAI/$USDC Uniswap pool, for example, uses less than 1 % of capital when trading between 0.99 USD and 1.01 USD because liquidity is spread evenly over the entire price curve. Most trading fees for LP and also most trading volumes pass through this price range.
UniSwap v3 provides the option of choosing your own price range when providing liquidity. Capital can be concentrated in the price ranges where most trades occur, thereby making it more efficient.
It is important that users trade with the combined liquidity, available at a particular price point. All price curves that overlap at that particular price point contribute to the combined liquidity. Trading fees are directly proportional to the volume of liquidity provided by all LP in a given range.
Concentrated liquidity concept provides liquidity providers with increased capital efficiency. Suppose you use a liquidity range of 0.99 to 1.01 in a stablecoin LP, which is a two-cent range. This means that the liquidity provider's liquidity will be used for more trades, resulting in a higher return on swap fees = higher return from liquidity providing. As a result, this is beneficial for traders who trade specific stablecoins. This is because greater liquidity is provided in this price range, resulting in fewer slippages and therefore better trading execution.
Active liquidity is another upgrade to concentrated liquidity. As the price of an asset rises or falls, it may leave the liquidity range defined by the LP position. The position ceases to be active and does not generate profits until the price returns to the range in which it was selected.
As prices move in one direction, the LP acquires more of one asset as swappers demand the other until all their liquidity is concentrated in just one asset (this behavior is less likely to occur in the Uniswap v2 version since LPs rarely reach the upper or lower bounds of the price of the two assets, i.e., 0 and ∞).
New fee tiers
Swap fees are no longer automatically reinvested as they were in previous versions of the Uniswap platform. As of the new version, they are collected separately from the pool and must be manually transferred.
In addition, Uniswap v3 introduces multiple pools for each pair, each with a different swapping % fee. There are four options available to liquidity providers: 0.01 %, 0.05 %, 0.30 % and 1 %. By offering this range of options, LP will adjust their fees in accordance with the expected volatility of the pair. When it comes to uncorrelated pairs such as $ETH/$USDC, liquidity providers take on more risk, and in contrast, minimal risk when it comes to correlated pairs such as $USDC/$DAI. Assets with the highest fees will be those that are not traded as frequently. This is because liquidity providers will be motivated to offset the volatility and associated risk of holding these assets for the duration of their position. UNI governance may add additional fee levels.
Range limit orders
By using this feature, you will be able to achieve the same goal as a traditional limit order, which can be set to a specific price. In the same way as traditional limit orders, range limit orders can be placed with the expectation that they will be executed at some point in the future, with the target asset becoming available for execution after the spot price crosses the whole range of the order.
Here is more information about range limit orders.
Uniswap v3 allows you to define your own price curve in each LP, meaning that your positions cannot be represented by ERC-20 tokens anymore.
As a result, the Uniswap platform includes a new feature: the liquidity provided is tracked using non-fungible tokens known as ERC721.
Uniswap v2 introduced time-weighted average price (TWAP) oracles. This TWAP recorded the cumulative prices of Uniswap pairs on a per-second basis. Calculating the exact TWAP for a particular period can be done by checking the price totals at the beginning and end of the period.
With Uniswap v3, all pools can serve as an oracle, providing access to price history and liquidity information. With this upgrade, a variety of on-chain applications are now possible. As of version v3, the data availability period could be extended ~9 days or longer.
Uniswap is an innovative and forward-looking protocol. If you are interested in technology and calculations, you may wish to read the Uniswap v3 whitepaper, which explains everything with specific calculations and formulas. The link can be found here.
The Uniswap community recently voted on December 21, 2022, to simplify their governance process. As a result, a new community governance process was established:
Phase 1: Request for Comment (RFC) - Minimum timeframe of 7 days
During this phase, proposals are shared with the Uniswap community, allowing time for review, discussion, and feedback. The proposer should respond to questions and take feedback into account for the next phase of the proposal.
Phase 2: Temperature Check - Timeframe of 5 days
This phase is designed to gauge community sentiment on a proposal before moving towards an on-chain vote. At the end of the 5-day period, the option with the majority of votes wins. If the "No change" option wins, the proposal will not advance to the next phase unless the community determines otherwise.
Phase 3: Governance Proposal - Waiting period of 2 days, Voting period of 7 days, Timelock of 2 days
Phase 3 is the final stage of the governance process. If the proposal passes successfully, then the changes will be implemented on-chain. Once the proposal is submitted, a two-day waiting period begins, followed by a seven-day voting period. If the proposal passes, a two-day timelock will take place before the proposed code is executed.
Changes to the Governance Process - Timeframe of 7 days
In the future, the Uniswap community governance process may need further modifications to keep up with the evolving needs of the community. While an on-chain vote is not always necessary, a clear display of community support and acceptance is crucial for legitimacy. Hence, all off-chain community governance process changes should be voted on through an off-chain Snapshot vote with a 7-day voting period.
Revenue and Tokenomics
The total supply of $UNI is limited to 1 000 000 000 tokens and there are currently 762 209 327 $UNI tokens in circulation.
$UNI were initially distributed as follows:
- Community: 60 %
- Team: 21.3 %
- Investors: 18 %
- Advisors: 0.7 %
The $UNI token was launched on September 1, 2020. It is estimated that the max supply will be reached in September 2024.
Once the maximum capped offer is reached, a perpetual inflation rate of 2 % per annum will be introduced, ensuring continued participation in Uniswap at the expense of passive holders of $UNI.
Centralized Exchange (CEX) listing – Binance, Coinbase, Kucoin, Kraken, Bitstamp, Bitfinex, Gemini, Bittrex, Bybit…
The Uniqueness of the Protocol
Uniswap v3 introduced several new features and significantly innovated the entire decentralized finance ecosystem (DeFi). There is a detailed description of these innovations in the article, which describes how the protocol works. However, Uniswap has left nothing to chance this time and has made sure to safeguard its innovations thoroughly.
The source code of version v3 of the protocol is copy-protected. In other words, it has been run under a Business Source License 1.1, which restricts the use of the Uniswap v3 source code for commercial and production purposes for a period of two years.
The Uniswap team decided to protect its source code from copying because in the past they had issues with users leaving to a competitor (for example, SushiSwap) who simply copied their code. It seems to me that this is the right move. In the future, more protocols should license their innovations for a specified period. However, it is incompatible with the philosophy of blockchain, which should be open source. By stealing all protocol innovations right from the start, competitors lose their uniqueness.
The creator of the Uniswap platform is Hayden Adams, who has also been involved in various Ethereum projects with Vitalik Buterin. It was originally called Unipeg, but Ethereum creator Vitalik Buterin named it Uniswap, and that is the origin of the name.
In Adam's own words, Uniswap was inspired by a blog post written by Vitalik Buterin. The entire idea was launched in 2017 and went live in November 2018. It gained popularity along with the new phenomenon of decentralized finance (DeFi).
Hayden Adams tweeted about the launch of the Uniswap v0 platform in 2018. At the time, he had approximately 200 followers.
Uniswap's development is fascinating, but I would need several pages to discuss it here. I recommend everyone get familiar with Hayden Adams' journey, as it is very inspiring. You can find the article on the Uniswap blog.
Although Uniswap does not have a formal Road Map, users are always informed of updates via the blog. They also post announcements of updates in their Discord channel.
The fact that Uniswap does not have a Road Map for the year ahead is a plus for me. There are many protocols that create a Road Map and then fail to follow it, which annihilates their credibility. I believe Uniswap took the appropriate approach. When the platform announces that they will bring about innovations, the users are all the more excited and therefore are not disappointed since the platform does not make any promises in advance.
Many users have become interested in the Uniswap protocol on the Ethereum blockchain. During one period, it was even criticized for slowing Ethereum down and causing transaction fees to rise sharply as a result of its popularity and high traffic.
As previously mentioned, Uniswap v3 introduced an anti-copying license that prevents source code copying for a period of 2 years and prevents forks like SushiSwap. Thus, the new version becomes more unique, and we can expect even higher increments of users who wish to try out the features on this platform in the near future.
The Ethereum network has switched to Proof of Stake (PoS), which has resulted in lower transaction fees and a faster network. During the next bull run, Ethereum will have to deal with the success of the apps built on top of it, as well as the demand related to them.
Community and Marketing
Uniswap gathers its community only on Twitter, Discord, Reddit, and Github. I like this solution because the community isn't spread among ten different social networks, but instead all comes together on these four. The Uniswap Labs Twitter account is slowly approaching a million followers, with users regularly engaging with their tweets. The team members on Discord are proactive, don't keep you waiting too long for an answer, and answer all questions promptly and helpfully. They organize regular community calls, and if you are interested in getting a glimpse into the developers' chat, you may apply for the role of "Uniswap Community Developer." Overall, I am very satisfied with the community.
Investors and Partners
Uniswap's investors include Paradigm, Polychain, Variant, SV Angel, a16z crypto, Andreessen Horowitz, Union Square Ventures, A. Capital Ventures, Variant Alternative Income Fund, SV Angel, Coinbase Ventures, Defiance Capital, ParaFi Capital, Delphi Digital and the list goes on.
A significant part of the success of the Uniswap protocol has been the integrations and partnerships: there are currently more than 200 integrations with partner protocols, wallets, data analytics providers, and other entities.
Here is an overview of the Uniswap platform partners.
Risks and Decentralization
Like any other DEXes, Uniswap is at risk of smart contract errors and hacker attacks. In addition, the value of $UNI is directly linked to the success of the platform, so if the platform were to fail, the value of the token would likely drop. In addition, the liquidity pool system can also be affected by market volatility, which can cause a high impermanent loss for liquidity providers. It is important that users thoroughly research and understand the risks before using the platform.
Uniswap is a community-managed platform that provides it with a high level of decentralization. The Uniswap is designed to be permissionless. To use the Uniswap platform, users do not need KYC.
Protocol Security and Audits
The most common problem associated with protocols in which developers remain anonymous is rug pull, which occurs when the developers themselves steal your resources.
Uniswap's team is publicly known through the Uniswap company, so this scenario is not a risk. If it occurs, the Uniswap company will be responsible for the consequences.
KYC – Do not have
Uniswap LLC: 181, North 11th Street, 11211 New York, New York
You can find the audit reports here:
Uniswap is an innovative protocol developed by experienced developers. It is evident from Hayden Adams' beginnings that we have much to look forward to in the future.
You should start with less capital if you wish to try out the Uniswap platform.
However, be aware that starting with less capital on the Ethereum blockchain (despite it holding the largest amount of liquidity) is not very efficient due to the higher fees. There are fees associated with each transaction on Ethereum, which are higher than on the other chains on which Uniswap is built. It is likely that you would have to wait a long time in order to receive a refund of your fees. Therefore, I recommend getting familiar with the Uniswap platform on the Polygon, Arbitrum, Optimism, or Celo blockchains.