The first-ever use case for decentralized finance, also known as DeFi, as it is commonly understood today, emerged even before the term itself has been coined and spread across the entire crypto landscape.
Since then, a decentralized exchange has advanced into such diverse fields as stable coins, borrowing & lending, alternative savings, and staking, to name a few. But exchanging cryptos in a free and decentralized manner did not lose its importance and appeal. It became the primary driver of DeFi, with Uniswap currently dominating the DEX landscape. In this article, we will focus on what Uniswap is and how it goes.
What Is Uniswap, After All?
Uniswap describes itself as a “transparent, censorship-resistant financial infrastructure for Ethereum” that “enables anyone to create new markets, provide liquidity, and build financial applications that could not have existed before.” For the readers who are confused with this concept, we will explain more about Uniswap with details.
To begin, let’s recall what tokens are. They are blockchain-based assets that can be issued and moved within a particular blockchain. And as tokens can also have value, they can be natively traded on-chain against each other.
There can be a few tokens in the Ethereum ecosystem, and many of the tokens follow the ERC20 standard.
Thus, Uniswap is a decentralized exchange built on the Ethereum blockchain that enables on-chain exchange, or swap, of ERC-20 tokens and conversion of Ethereum to ERC-20 tokens and vice versa.
Understanding Liquidity Pools of Uniswap
The next thing crucial to understand the inner workings of Uniswap is its liquidity pools. Liquidity, defined as the availability of assets in a market, is a must for any exchange, decentralized or otherwise, to work correctly. Without enough liquidity, there is no way to discover an asset’s price, and trading tokens may be impossible. In short, creating an exchange will not suffice as you also need to create a market for it and provide liquidity to it.
In essence, Uniswap enables users to start a dedicated exchange for any ERC20 token by creating an Exchange contract that holds a liquidity pool of both ETH and the token. Anyone can add liquidity to this pool in exchange for a proportional share of trading fees collected on token swaps.
But how is liquidity added to an Exchange contract on Uniswap? Understanding the answer to it is key to understanding the whole concept of pooling in liquidity and establishing an exchange for a token. Adding liquidity to the pool means sending to the token’s Exchange contract address an equivalent value of ETH and ERC20 token as determined by the exchange rate at the deposit time.
Technically, you don’t even need to enter the exact token amount as it is automatically calculated based on the amount of ETH you want to pool in and the exchange rate for that token. If you are the first liquidity provider to join a pool, you set the initial exchange rate by depositing what you believe to be the fair value of the token in ETH, although bearing the risk of arbitrage traders taking advantage of any price discrepancy.
With liquidity pools, there is no need to maintain an order book as is required on centralized exchanges like Bitfinex and Binance or done on decentralized ones such as IDEX and EtherDelta. As Uniswap Exchange contracts hold liquidity reserves in ETH and ERC20 tokens, trades can be instantly executed against these reserves, regardless of whether you are selling or buying tokens, with the prices automatically adjusted according to the pool balance.
In this manner, liquidity pools allow Uniswap to offer an automatic market maker mechanism that finds the price based on the equilibrium of the pool reserves as represented by the quantity of ETH and ERC20 tokens available for a particular exchange.
Uniswap Fee Structure
Given that Uniswap is a decentralized exchange, deposits or withdrawals are unnecessary, so either deposits or withdrawal fees do not exist. Both Uniswap V1 and Uniswap V2 charge a flat fee of 0.3% per trade for swapping between ETH and ERC20 tokens. The swap fees are then split among liquidity providers, with their share based on their pooled tokens’ ratio relative to the entire pool reserves.
However, with Uniswap V1 to make an ERC20 to ERC20 token swap, you would first have to pay 0.3% for ERC20 to ETH swap on the input exchange, then as much for ETH to ERC20 swap on the output exchange, and that would effectively amount to 0.5991% fee on the input ERC20 token. It is known as “ETH bridging,” and it is no longer required with Uniswap V2 to facilitate the exchange of two ERC20 tokens.
Uniswap was launched on November 2, 2018, with its second version going live on May 18, 2020, allowing anyone to create an ERC20 token exchange, swap ERC20 tokens in a trustless manner, and add tokens to a liquidity pool to earn on swap fees. This seemingly simple business model had recently allowed Uniswap to expand its market share to nearly 40%.
The non-custodial exchange market continues to evolve with competitive protocols such as Uniswap rapidly. FLETA recognizes that being listed on Uniswap will be a great opportunity for international community members to exchange FLETA easily.
FLETA is a blockchain platform that aims to offer infrastructure that can be applied to real-world business models. FLETA has its own core blockchain technologies like Level Tree Validation, Parallel Sharding, Independent multi-chain Structure, Block Redesign, and PoF(Proof-of-Formulation) which is its own consensus algorithm. With them, it aims to solve problems that existing platforms have such as slow speeds, scalability limitation, and excessive fees and provide a flexible development environment. Moreover, through its Gateway technology, it enhanced its interoperability by allowing projects issuing their tokens through other mainnets to maintain their mainnets while using FLETA chain.
Sendsquare, a foundation that developed FLETA project, was selected as one of the blockchain PoC support projects by the National IT Industry Promotion Agency (NIPA) of the South Korean Government since 2019 and has developed the blockchain-based on-chain clinical data management system (eCRF System) and RWD basic clinical research analysis report platform using blockchain technology.
Feel free to join and connect with us through any of our official channels below:
FLETA Store: https://fleta.ogn.app/#/