In the cryptocurrency industry, trading through centralized exchanges (CEX) is currently the mainstream. In the past, when many investors first learned about cryptocurrencies, they traded through centralized exchanges such as Binance and FTX.
However, the collapse of FTX in 2022 led to financial crises in other exchanges, causing the "opacity" of centralized exchanges (CEX) to pose a huge concern to the security of user funds. Because of the FTX incident, many investors transferred their virtual currency assets to decentralized exchanges (DEX) or their own cold wallets.
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Uniswap is a decentralized cryptocurrency exchange (DEX) built on the Ethereum blockchain. Trading with Uniswap is directly connected to the user's private key, greatly reducing the risk of bankruptcy caused by poor management of centralized exchanges (CEX).
1. What is Uniswap (UNI)?
Uniswap is one of the largest decentralized exchanges (DEX) in the cryptocurrency industry and is a decentralized exchange protocol built on Ethereum. The Uniswap protocol was created by Hayden Adams in 2018. However, the technical principles it applies were first proposed by Ethereum co-founder Vitalik Buterin.
Uniswap provides basic functions of an exchange, such as trading cryptocurrencies and liquidity mining. It runs on Ethereum, and users use an automated market maker protocol (AMM) called Constant Product Market Maker instead of the previous spot market orders to exchange any ERC-20 token.
Traders can trade Ethereum tokens on Uniswap without having to trust their funds to anyone. It does not use an order book or any centralized platform to trade. Uniswap allows users to trade cryptocurrencies without the need for traditional order books or centralized intermediaries, and enjoys a high degree of decentralization and censorship-free characteristics.
Uniswap encourages liquidity providers to stake cryptocurrencies and build liquidity pools to maintain operations, and buyers use these liquidity pools to trade instead of looking for suitable buyers or sellers in the spot market themselves.
Uniswap is simple, low-cost, and can list almost all ERC-20 tokens, and Uniswap does not charge any listing fees. Uniswap also supports the exchange of ETH with other tokens or ERC20 tokens; in addition, Uniswap has a liquidity pool mechanism, which can also provide liquidity to earn income, allowing users to earn fees by contributing to liquidity pools and transactions.
In summary, transactions on Uniswap are exchanges in a pool of funds, which is different from traditional financial transactions that need to be carried out by matching orders from buyers and sellers.
2. What is UNI coin
UNI coin is the native token of the Uniswap protocol, which gives holders governance rights. In September 2020, Uniswap launched the network's governance token UNI. UNI coin holders can vote on Uniswap's existing proposals and also propose future development directions.
The initial supply of UNI coins is 1 billion, which are distributed to Uniswap community members, team members, and investors. Some of them are also distributed to users who provide liquidity as liquidity mining rewards.
The total supply of UNI is 1 billion, which will be released gradually over a four-year period, and the long-term inflation rate will be 2%. Therefore, as long as Uniswap continues to grow, the price of UNI can be increased.
The distribution of UNI Genesis tokens is as follows:
Distribution Target Distribution Percentage Uniswap Community Users 60% Team Members 21.51% Founders 17.8% Consultants 0.69%
Image: TradingView 2023/04
3. How does Uniswap work?
The biggest difference between Uniswap and the traditional architecture of digital exchanges is that it does not use an order book. Instead, it uses a constant product market maker, which is an automated market maker (AMM) mechanism.
Each Uniswap liquidity pool is a trading place for a pair of ERC20 tokens. When the pool contract is created, the balance of each token is 0; in order for the pool to start facilitating transactions, liquidity providers will provide funds to the "liquidity pool". When someone trades in the pool, the liquidity provider can get a certain percentage of the transaction fee.
How is the constant product calculated?
The formula for constant product: X x Y = K. Assume that the two virtual currencies are ETH (X) and USDT (Y), and their respective quantities are X and Y. The product of the two currency quantities XY is a constant value, which we call K.
Assume that there are 50 ETH and 100 USDT in the ETH/USDT pool, the total liquidity of the pool = the amount of ETH x the amount of USDT, constant value = X x Y = 50 x 100 = 5,000.
When the K value remains unchanged, X and Y are in an inverse relationship. When a user uses USDT to purchase ETH in the fund pool, the amount of USDT in the fund pool will increase, while the amount of ETH in the fund pool will decrease, causing the price difference between USDT and ETH to widen. Therefore, later users need to buy ETH at a higher price.
The smaller the K value of the total capital pool, the smaller the number of tokens in the capital pool, and the more price differences will occur. Therefore, liquidity mining will appear, the purpose of which is to increase the K value. The larger the total amount of funds in the capital pool, the smaller the price difference will be.
Uniswap Pool Tokens
Whenever liquidity is deposited into a pool, a unique token called a liquidity token is generated and sent to the provider's address. These tokens represent the liquidity provider's contribution to the pool. The proportion of pool liquidity provided determines the number of liquidity tokens the provider receives.
If the provider is minting a new pool, the amount of liquidity tokens they will receive will be equal to (X x Y), where X and Y represent the amount of each token provided. Whenever a trade occurs, a 0.3% fee is charged to the sender of the trade. This fee is distributed proportionally to everyone in the pool after the trade is completed.
To withdraw liquidity, plus any accrued fees, liquidity providers must âburnâ their liquidity tokens, effectively exchanging them for their portion of the liquidity pool, plus a pro-rata share of fees.
Since liquidity tokens are themselves tradable assets, liquidity providers can sell, transfer, or otherwise use their liquidity tokens in any way they see fit.
Why choose Uniswap mining pool?
Uniswap is unique in that it does not use an order book to match buyers and sellers. Instead, Uniswap uses what are called liquidity pools. While order books are fundamental to traditional financial transactions and are very useful for some trading use cases, they have some important limitations that are particularly severe when applied to decentralization or blockchains.
The order book requires the role of an intermediary to manage the order book and match orders between buyers and sellers. This creates control points and adds additional complexity. The process also requires the active participation and management of market makers, who usually use complex technology and algorithms and are limited to professional traders.
Uniswap focuses on Ethereum's strengths and reimagines token exchange from first principles. Blockchain-native liquidity protocols should leverage trusted code execution environments, autonomous and permanently running virtual hosts, and open, censorship-free, and inclusive access models, thereby generating an exponentially growing virtual asset ecosystem.
4. What is the difference with centralized exchanges?
How is the Uniswap decentralized exchange different from centralized exchanges like Binance?
1. No KYC required:
All transactions on Uniswap are conducted through smart contracts, so there is no need for KYC certification of personal information. It is less likely that user accounts or wallets will be stolen or disabled. As long as you hold a cryptocurrency wallet, you can trade.
2. Differences in trading modes:
Uniswap's decentralized approach is to use the AMM (automated market maker) mechanism to maintain the value of assets in the capital pool through an algorithmic formula rather than being determined by the actual current price.
Centralized exchanges like Binance use an order book approach to help match orders from buyers and sellers to complete transactions.
3. Token listings are exempt from lengthy review:
Uniswap does not require lengthy review to list new coins, and the listing speed is fast. There are many centralized exchanges, but they also face the risk of counterfeit coins being listed.
5. What are the advantages and disadvantages of Uniswap?
Uniswap Advantages
1. Uniswap does not require KYC certification, which avoids the risk of personal information leakage for users and relatively improves the security of user privacy.
2. There is no set threshold for listing tokens, and all users can list any token on Uniswap.
3. When using Uniswap for transactions, users can connect to their own private keys, greatly reducing the risks of operating centralized exchanges and avoiding losses of their own assets.
Uniswap Disadvantages
1. Trading on Uniswap is not a traditional financial transaction model, so when exchanging tokens, the transaction price cannot be determined by the user.
2. The transaction fee on Uniswap is about 0.3%, which is higher than the transaction fee of centralized exchanges at about 0.1%.
3. Because Uniswap has no threshold for listing tokens, the risk of counterfeit coins is relatively high. It is recommended to be cautious when investing on the Uniswap platform.
6. Choose OANDA to participate in UNI coin trading process:
UNI coins are traded as CFDs (Contracts for Difference) at OANDA.
1. Open an account
Simply fill out the online application form and you can open an OANDA trading account for free on the same day. You do not need to provide proof of identity or address to open an account.
> Click here to view the tutorial on opening an OANDA account
2. Deposit
After successfully opening an account, you can deposit money into your account. OANDA provides a variety of deposit channels: credit card, bank wire transfer, Skrill and Neteller. Among them, credit card deposit is usually the most convenient and can be deposited instantly.
>Click here to view OANDA credit card deposit tutorial
3. Install trading software
UNI coins can be traded on MT4, MT5, and fxTrade trading software (platforms) provided by OANDA. After downloading and installing, enter the login information to successfully log in to the trading platform.
>Â OANDA MT5 trading platform download, installation and login tutorial
>Â OANDA MT4 trading platform download, installation and login tutorial
>Â Download, install and log in tutorials for the iPhone version of fxTrade trading platform
4. Start trading
After logging in, you need to transfer the previously deposited funds to your trading account through "internal transfer", which is usually immediate. Once the amount is displayed in your trading account, you can trade on the trading platform.
