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CEX vs DEX: how does Uniswap work?

Let’s find out the difference between centralized and decentralized exchanges by delving into Uniswap and AMMs

Gianmarco Guazzo
Coinmonks
Published in
5 min readSep 30, 2020

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In the last period the world of DeFi has literally exploded, with many innovative projects presented every day and with an amount of funds blocked within these platforms that has broken down the wall of 10 billion dollars. The demand for this type of financial services is significantly increasing, even if most of the platforms have critical points that should not be underestimated.

One of the most interesting protocols that for several months has been fighting for the top of the ranking of DeFi platforms is certainly Uniswap, which thanks to the release of the governance token has once again become one of the most followed projects by professionals. However, its functioning is not fully understood, since being a Decentralized Exchange there is always the unknown of who provides liquidity, especially by users accustomed to using centralized services.

To fully understand this project, we try to go into detail and compare it to the centralized alternative, in order to understand the pros and cons of the two approaches. From the Uniswap site you can see mainly 4 sections, each of which is fundamental in the functioning of the ecosystem, which are:
- Pool,
- Swap,
- UNI,
-Vote.

Liquidity Provider Uniswap

Pool: provide liquidity in exchange for fees

In centralized exchanges, liquidity is provided directly by the platform that holds the funds and currencies involved in all respects. This type of approach provides a big advantage to the CEX as it directly earns the fees paid by the user and the transactions are almost instantaneous (even if you then have to switch to the Blockchain in effect to move them to a personal wallet). In Uniswap (but in general in DEXs) the liquidity is provided by the users themselves, who supplying the tokens to a particular pool, receive in exchange the fees paid by all those who swap the tokens. In fact, liquidity providers earn a 0.3% commission on all trades proportional to their share of the pool. Fees are added to the pool, accrue in real time and can be claimed by withdrawing cash.

Swap Uniswap

Swap: exchange tokens by paying a fee

While in the CEXs the user “speaks” directly to the platform and buys the token of his interest, in the DEX the situation is a little different. The user who is interested in a token (suppose an ERC20) in order to receive it needs to exchange, and therefore swap, with another token or coin. In general, using the example of Uniswap, the user must have Ethereum to trade, for example, with Compound, Curve and many others. By doing this, the user pays a 0.3% fee directly to the pool on which he exchanged the token, which will then be divided among all liquidity providers.

UNI Uniswap

UNI: how to earn governance tokens

In this section, the user has the opportunity to earn DEX Uniswap governance tokens through Liquidity Mining. Inside, in fact, we find a series of liquidity pools to which the user can add liquidity and receive in exchange (in addition to 0.3% of the swap fee) also the platform tokens. The pools to which liquidity can be added are: ETH-DAI (MakerDAO Stable coin pegged to the dollar value), ETH-USDC (Stable coin USD Coin), ETH-USDT (Stable coin Tether) and ETH-WBTC (wrappedBitcoin, i.e. Bitcoin in the form of an ERC20 token). Each pool has a UNI emission pool rate which is currently around 583,333 UNI / week.

Vote: Become an active member of governance

This is obviously the part in which the DEX differs most from the CEX: governance and therefore the decision-making activities for most of the public aspects are in the hands of users and holders who express their opinion through a vote. For the moment, no big votes have been proposed but more and more governance tokens are finding their place in the DeFi world. Obviously, unlike DEX, in centralized exchanges the choice falls on the development team and the owners of the platform, monopolizing the decisions and making their own decisions.

What do you think about Uniswap? Do you prefer CEX or DEX?

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Gianmarco Guazzo
Coinmonks

Written by Gianmarco Guazzo

584 Followers
Writer for

+100k views on Medium, Bitcoin & Ethereum Enthusiast, Smart Contract Developer. Follow me for technical & informative web3 contents

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