Uniswap as a protocol was created by an individual named Hayden Adams who is also the creator of Ethereum cryptocurrency. The invention took place some time back in the year 2018 and was motivated by the desire to bring automated market makers to more users other than just Ethereum users. The protocol was built on top of the Ethereum blockchain. Uniswap remains compatible with all ERC-20 tokens. ERC-20 tokens form the standard that is used to create smart contracts on Ethereum. The abbreviation UNI is often used to refer to Uniswap token, which is the native governance token. Governance tokens hold more power in that they give the holder the authority to cast votes on proposed changes to the platform.
What motivated the introduction of Uniswap tokens?
Governance tokens weren’t originally part of the Uniswap protocol, but were instead introduced in late 2020 to serve as an incentive to make people to stay with the Uniswap platform instead of migrating to competing decentralized exchanges. Just a month before Uniswap introduced governance tokens, a competing DEX named SushiSwap had introduced governance tokens on its platform and encouraged users to migrate to its platform in exchange for the tokens. This move seemed to be working as people were migrating from Uniswap bot to Sushiswap and Adams wouldn’t have it. Therefore, he designed Uniswap tokens to attract more users and to retain the ones that were already active on the platform. A billion Uniswap token were created in total and out of these, 150 million were given to users who had used the platform previously.
How does Uniswap work?
Uniswap is more or less like any digital trading platform in that it facilitates the purchase and sell of cryptocurrency assets with the use of smart contracts. What makes this platform unique and only rivaled by a few others like itself is the fact that it is decentralized. In fact, this platform is among the largest decentralized cyrptocurrency exchange platform in existence today.
Uniswap allows people to trade cryptocurrencies directly with each other, something that helps remove intermediaries. What this does is that it promotes speed and reliability. Transactions can now be done at a much faster rate because there is no need for waiting for transactions to be cleared by third parties. Uniswap used an automated liquidity protocol to be able to achieve the kind of speed and reliability it offers people.
What is an automated liquidity protocol?
It wouldn’t make much sense to conclude this article without mentioning something about automated liquidity protocol. In simple terms, this is an automated market-making algorithm, often abbreviated as AMM. In this protocol, Uniswap bot liquidity pool generates its own tokens. There are usually two reserve token contained in every token generated. All smart contracts use the reserve tokens (ERC-20 tokens) as the standard for all smart contracts. Thus, if you are holding Ethereum tokens you also become a liquidity provider for the Uniswap liquidity pool. For every trade that occurs, Uniswap charges users a fee of 0.30%.
