What is Uniswap - A Beginner's Guide (2024 Updated)

Summary

The video script from Crypto Whiteboard Tuesday, hosted by Nate Martin of 99Bitcoins.com, offers an insightful explanation of Uniswap and its UNI token. Uniswap is presented as a decentralized exchange (DEX) operating on the Ethereum blockchain, allowing users to trade ERC-20 tokens in a permissionless manner without the need for a middleman. The script contrasts Uniswap with traditional centralized exchanges, highlighting the latter's need for KYC compliance and the control over users' funds. The video also delves into the mechanics of decentralized finance (DeFi), explaining how liquidity pools and automated market makers (AMMs) function within DEXs to facilitate trades and determine prices. The UNI token, introduced through an airdrop, is described as a governance token that grants holders voting rights on Uniswap's development. The script emphasizes the importance of due diligence when trading on Uniswap due to the presence of various tokens, including potential scam coins. The episode concludes by encouraging viewers to engage with the content and subscribe for updates.

Takeaways

• 🔄 **Uniswap Definition**: Uniswap is a decentralized exchange (DEX) that enables direct trading of Ethereum ERC-20 tokens without a middleman.
• 🏦 **Centralized vs Decentralized**: Traditional exchanges are centralized and require KYC, while Uniswap is permissionless and does not require personal information.
• 💼 **Order Books and Smart Contracts**: Centralized exchanges use order books to match buyers and sellers, whereas Uniswap uses smart contracts on the Ethereum blockchain.
• 💰 **Liquidity Pools**: Uniswap operates through liquidity pools, where users can deposit funds to facilitate trades and earn a portion of the trading fees.
• 📈 **Pricing on Uniswap**: Prices on Uniswap are determined by an Automated Market Maker (AMM) using the Constant Product Market Maker Model, which keeps liquidity without external market makers.
• 🛍️ **Trading on Uniswap**: Users can trade ERC-20 tokens directly from their Ethereum wallets, maintaining control over their funds.
• 📊 **Slippage Tolerance**: Due to the nature of Ethereum transactions, users can experience slippage on Uniswap, which is the difference between the expected price and the executed price of a trade.
• 🚫 **Token Legitimacy**: Uniswap lists a wide variety of tokens, including potential scam coins, so users must conduct their own research before investing.
• 🪙 **UNI Token Purpose**: The UNI token is a governance token distributed via airdrop to previous Uniswap users, allowing them to vote on development decisions.
• ⏳ **Uniswap's Evolution**: Uniswap has evolved through versions V1, V2, and V3, each introducing new features and improvements to capital efficiency and trading.
• 🌐 **DeFi and Blockchain**: Uniswap is part of the DeFi ecosystem, leveraging blockchain technology to offer financial services in a decentralized manner.

Q & A

What is Uniswap?

Uniswap is a decentralized, permissionless exchange built on the Ethereum network that allows users to trade Ethereum ERC-20 tokens directly without the need for a middleman or centralized authority.

How does Uniswap differ from traditional cryptocurrency exchanges?

Uniswap differs from traditional exchanges by being decentralized, meaning it operates without a controlling company or centralized servers. It also doesn't require users to go through KYC (Know Your Customer) processes, and it allows users to maintain control over their funds by trading directly from their own wallets.

What is the UNI token?

The UNI token is a governance token introduced by Uniswap through an airdrop in September 2020. It allows holders to influence and vote on development decisions related to the Uniswap platform.

How does liquidity work on Uniswap?

Liquidity on Uniswap is provided through liquidity pools, which are shared pots of funds deposited by the public. Liquidity providers (LPs) receive a portion of the trading fees in a process known as liquidity mining.

What is the 'Constant Product Market Maker Model'?

The 'Constant Product Market Maker Model' is an Automated Market Maker (AMM) used by Uniswap to determine the price of coins on its platform. It follows the formula X * Y = K, where X and Y are the amounts of the two tokens being traded, and K is a constant value.

How does slippage occur on Uniswap?

Slippage occurs on Uniswap because each trade is an Ethereum transaction that takes time to be broadcasted and confirmed by the Ethereum network. During this time, the price of the token may change, resulting in the executed price differing from the price at the time the order was placed.

Why is it important to do your own research when trading on Uniswap?

It's important to do your own research when trading on Uniswap because, unlike traditional exchanges, Uniswap does not conduct extensive due diligence on the tokens listed. This means that there may be scam coins listed, and the onus is on the user to determine the legitimacy and value of a token.

What are the benefits of using a decentralized exchange like Uniswap?

Benefits of using Uniswap include not having to go through KYC processes, maintaining full control over funds, and the ability to trade a wide variety of ERC-20 tokens. It also provides a higher degree of privacy and censorship resistance compared to centralized exchanges.

How has the UNI token's value changed since its introduction?

Since its introduction through an airdrop in September 2020, the UNI token's value has risen substantially. This increase reflects the perceived future value of Uniswap and the desire of investors to participate in its governance.

What are the different versions of Uniswap that have been released?

Uniswap has released three main versions: V1 in November 2018, which allowed trading of any ERC-20 token to Ether; V2 in May 2020, which enabled direct trading of ERC-20 tokens without the need for Ether; and V3 in May 2021, which introduced more capital efficiency and lower trading costs.

Why is liquidity important for an exchange?

Liquidity is crucial for an exchange because it determines how easily buyers and sellers can find a match and execute trades. High liquidity ensures that trades can be completed quickly and at a fair market price, which is essential for the health and functionality of the exchange.

How does the 'Slippage' tolerance setting work on Uniswap?

The 'Slippage' tolerance setting on Uniswap allows users to set a limit on how much the price can change from the time the order is placed to when it is executed. If the price change exceeds the set tolerance, the order is automatically canceled, protecting users from unfavorable price movements during transaction confirmation.

Outlines

00:00

🤔 Introduction to Uniswap and Cryptocurrency Exchanges

The video script begins with an introduction to Uniswap, a decentralized cryptocurrency exchange, and poses several questions about its operation and the UNI token's recent price surge. Nate Martin from 99Bitcoins.com welcomes viewers to 'Crypto Whiteboard Tuesday,' a series that simplifies complex crypto topics. The importance of having prior knowledge of cryptocurrencies to understand the topic is emphasized. Uniswap is described as a permissionless exchange that facilitates direct trading of Ethereum ERC-20 tokens without a middleman. Traditional exchanges are contrasted with Uniswap, highlighting their centralized nature, regulatory requirements (KYC laws), and the process of trading involving order books and matched orders. Additional resources for learning about cryptocurrency trading and exchanges are suggested.

05:04

💡 Understanding Decentralized Finance and Uniswap's AMM

The script delves into decentralized exchanges (DEXs), which are part of the DeFi ecosystem. It explains that DEXs operate on blockchain through smart contracts, eliminating the need for a central authority or personal information for participation. The concept of liquidity pools, which provide liquidity without an order book, is introduced. Liquidity providers (LPs) earn a portion of trading fees through liquidity mining. The price determination on a DEX is different, using an Automated Market Maker (AMM) and a mathematical formula (X * Y = K) to facilitate trades within a liquidity pool. Uniswap's specific AMM, the 'Constant Product Market Maker Model,' is detailed, showing how the price of tokens is calculated based on the tokens' availability in the pool. The evolution of Uniswap from its initial version to the latest, which offers more efficient trading and capital utilization, is outlined. Practical steps for using Uniswap are provided, including setting up a Metamask wallet and connecting to Uniswap.org to trade listed ERC-20 tokens. The concept of 'slippage' due to transaction confirmation times on the Ethereum network is also explained.

10:06

🚨 The Risks and Rewards of UNI Token Governance

The script discusses the nature of slippage in trades on Uniswap and the platform's support for a wide variety of ERC-20 tokens, including some scams. It cautions viewers to conduct their research before investing in any token listed on Uniswap. The UNI token is then explored, introduced through an airdrop to previous Uniswap users. Unlike traditional currencies, the UNI token serves as a governance token, allowing holders to vote on development decisions. The token's value is tied to the perceived future value of Uniswap and the influence its holders have over its direction. The video concludes with an invitation for viewers to ask questions and engage with the content, and a reminder to like, subscribe, and enable notifications for future episodes.

Keywords

💡Uniswap

Uniswap is a decentralized exchange (DEX) that operates on the Ethereum blockchain, allowing users to trade Ethereum ERC-20 tokens directly without a middleman. It is a key feature of the decentralized finance (DeFi) ecosystem and is known for its permissionless and automated trading through smart contracts. In the video, Uniswap is introduced as a subject of focus to explain how it differs from traditional cryptocurrency exchanges and its role in facilitating token trades.

💡Decentralized Exchange (DEX)

A decentralized exchange, or DEX, is a type of cryptocurrency exchange that does not rely on a central authority or company to facilitate trades. Instead, it operates through smart contracts on a blockchain. DEXs are part of the DeFi ecosystem and offer a higher degree of user autonomy and privacy. In the context of the video, DEXs like Uniswap are contrasted with traditional, centralized exchanges to highlight their distinct operational models and benefits.

💡ERC-20 Tokens

ERC-20 tokens are a class of token that adheres to the Ethereum Request for Comment 20 (ERC-20) standard, which defines a common list of rules that all ERC-20 tokens follow. This standardization allows for compatibility with wallets, exchanges, and other services within the Ethereum ecosystem. The video discusses how Uniswap enables trading of various ERC-20 tokens, which is a significant aspect of its utility.

💡UNI Token

The UNI token is a governance token introduced by Uniswap that allows its holders to participate in the governance of the platform by voting on proposals. It was initially distributed through an airdrop to users who had interacted with Uniswap before a certain date. The video explains that despite not being designed as a currency, the UNI token has gained substantial value, reflecting the perceived future value of Uniswap and the desire of users to have a say in its governance.

💡Smart Contracts

Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They are a fundamental component of blockchain technology and enable decentralized applications like Uniswap to function. In the video, smart contracts are mentioned as the technology that allows DEXs to operate without central control, executing trades based on predefined rules.

💡Liquidity Pools

Liquidity pools are a mechanism used by DEXs to provide liquidity for trading. They are funds deposited by users, known as liquidity providers (LPs), which are then used to facilitate trades. The video explains that liquidity pools are a shared resource on DEXs like Uniswap, which contrasts with the order book system used by traditional exchanges.

💡Automated Market Maker (AMM)

An Automated Market Maker is a system that uses algorithms to set the prices of assets in a decentralized exchange. Uniswap uses a specific AMM called the 'Constant Product Market Maker Model' to determine the price of tokens. The video describes how this model allows for the constant product of the amounts of tokens in a pool to remain fixed, thus setting the price based on the ratio of tokens in the pool.

💡Slippage

Slippage refers to the difference between the expected price of a trade and the executed price, which can occur due to market movements during the time it takes for a transaction to be confirmed on the blockchain. The video mentions slippage as a phenomenon users might experience on Uniswap, where the displayed price at the time of order placement may differ from the price at the time of execution.

💡Governance Token

A governance token is a type of cryptocurrency that gives holders the right to vote on proposals and decisions related to the project's development. The UNI token, as discussed in the video, is an example of a governance token, where its holders can influence the future direction of Uniswap through voting rights.

💡Decentralized Finance (DeFi)

Decentralized finance, or DeFi, refers to financial services that are built on blockchain technology and operate without traditional intermediaries like banks. The video highlights DeFi as the ecosystem within which Uniswap and other DEXs operate, providing services like exchanges, lending, and insurance in a decentralized manner.

💡KYC Laws

KYC, which stands for 'Know Your Customer', is a set of regulations that require businesses to verify the identity of their customers. The video contrasts KYC requirements of traditional exchanges, where users must provide personal information, with the anonymity offered by DEXs, which do not require such identification.

Highlights

Uniswap is a decentralized, permissionless exchange for trading Ethereum ERC-20 tokens directly without a middleman.

Traditional exchanges are centralized and require extensive personal information for KYC laws.

Users on traditional exchanges deposit money, giving the exchange control over their funds.

Decentralized exchanges (DEXs) are part of the DeFi ecosystem and operate without a controlling company.

DEXs use smart contracts deployed on a blockchain, executed by a network of independent computers.

Uniswap allows users to trade directly from their own wallets, maintaining full control over their funds.

Liquidity on DEXs is created through liquidity pools, shared pots of funds deposited by the public.

Liquidity providers (LPs) receive part of the DEX's trading fees through liquidity mining.

Price on Uniswap is determined using an Automated Market Maker (AMM) called the Constant Product Market Maker Model.

The AMM model uses a formula X * Y = K to maintain liquidity and deter large orders from consuming the entire pool.

Uniswap is the most popular decentralized application (DAPP) on the Ethereum platform.

The UNI token, introduced through an airdrop, is a governance token allowing holders to influence and vote on development decisions.

The value of UNI represents the perceived future value of Uniswap and the willingness of people to participate in its governance.

Uniswap does not conduct due diligence on tokens listed, so users should perform their own research before investing.

Slippage on Uniswap occurs due to the time it takes for Ethereum transactions to be broadcasted and confirmed.

Uniswap supports a wide variety of ERC-20 tokens, including many scam coins, so caution is advised.

To use Uniswap, users need an Ethereum wallet like Metamask, which can interact with Ethereum applications.

The Uniswap team aims to gradually reduce their involvement, leaving the project's management to UNI token holders.

Transcripts

What is Uniswap?

How is it different from traditional cryptocurrency exchanges?

And what is this UNI token that’s been rocketing up the price chart?

Well stick around, here on Crypto Whiteboard Tuesday,

we’ll answer these questions and more.

Hi, I’m Nate Martin from 99Bitcoins.com

and welcome to Crypto Whiteboard Tuesday

where we take complex cryptocurrency topics,

break them down

and translate them into plain English.

Before we begin,

don't forget to subscribe to the channel

and click the bell so you’ll immediately get notified

when a new video comes out.

Today’s topic is Uniswap and the UNI token.

It’s important to note that this is an advanced topic

that relies on prior knowledge of how cryptocurrencies work.

If you’re new to crypto

you may want to check out additional videos

that we’ll mention and link to in the description

to get you up to speed.

Now let’s get started.

Uniswap is a decentralized, permissionless exchange

that allows anyone to trade Ethereum ERC-20 tokens directly

without the use of a middleman.

OK...what exactly did I just say?

Don’t worry: we’re going to work through this together.

To understand what makes Uniswap different,

let’s start out by taking a look at how a traditional cryptocurrency exchange,

like Kraken or Bitstamp works.

To begin with, traditional exchanges are centralized,

meaning they are owned by a company

that has complete control over the exchange

and the computers that run it.

Traditional exchanges are also regulated by KYC laws,

which is an abbreviation for ‘Know Your Customer’.

These laws require each new customer

to provide extensive personal information,

including your home address and tax ID numbers

before you can begin trading on the exchange.

Additionally, in order to trade on a traditional exchange,

users need to deposit money on the exchange,

basically giving the exchange control over their funds.

On a traditional exchange,

when users want to buy or sell a certain cryptocurrency

they submit a “Buy” or “Sell” order.

All of these orders are recorded in the exchange’s order book.

Once there’s a match between a buyer and a seller,

a trade is conducted.

So this is how a traditional, centralized exchange works.

If you want to learn more about exchanges and trading,

you can check out our “What is Bitcoin trading” video

which we’ll link to below.

Now let’s talk about decentralized exchanges,

also known as DEXs.

DEXs are part of the decentralized finance ecosystem.

Decentralized finance, or DeFi for short,

is a term given to traditional financial services

such as exchanges, lending services, and insurance,

that have been decentralized

through the use of Blockchain technology.

If you’re not familiar with DeFi or Blockchain technology

you can also check out these two videos.

We’ll leave the links in the description

Now, unlike a traditional exchange

that requires a controlling company and centralized servers to operate,

A DEX consists of a set of smart contracts deployed on a blockchain.

In simple terms, it’s a set of automated rules

that are executed by a network of independent computers

without any central entity controlling it.

And if you want to learn more about smart contracts

and how they work,

you can take a look at our “What is Ethereum” video.

Since DEXs aren’t controlled by anyone,

they can’t be regulated and are in fact open to everyone.

When using a DEX there’s no need to open an account,

or go through an identification process

where you’d have to supply your personal information.

Additionally DEXs allow users to trade directly

from their own wallets

allowing them to keep full control over their funds.

A key difference a DEX has from a traditional exchange

is in the way transactions are conducted

and how price is determined.

As I’ve mentioned earlier,

in a traditional exchange

buyers and sellers set their price expectations

as “Buy” and “Sell” orders inside the order book.

The more buyers and sellers an exchange has,

the larger its order book

and the more “liquid” the exchange is said to be.

In other words,

it’s easier to find a buyer and a seller that agree on a price

and make a trade.

Imagine there are only 2 buyers and 2 sellers on a certain exchange.

It would be very hard for any trade to get executed,

since it's unlikely to find two people who would agree on a price.

Without liquidity the exchange is practically dead

since no trades can be conducted.

It’s the same as having a shopping mall

with very few stores or and customers.

There’s not a lot of business that will be done there.

In fact, liquidity is such an important criteria

to determine the quality of an exchange,

that some exchanges use external services called “market makers”

that are willing to buy and sell at all times,

creating constant liquidity for the exchange.

DEXs, on the other hand, don’t store any user funds

and have no order book.

Liquidity on DEXs is created through liquidity pools.

Liquidity pools are a shared pot of funds

deposited by the general public,

and DEXs use liquidity pools in order to fulfill “buy” and “sell” orders.

People who deposit funds in liquidity pools

are known as liquidity providers or LPs.

In exchange for the locked funds,

LPs receive a part of the DEX’s trading fees

in a process known as liquidity mining.

Now that we’ve covered the differences

in how liquidity is provided between traditional and decentralized exchanges,

let’s talk about how the price of a certain coin is determined.

On a traditional exchange,

when a seller and buyer reach an agreement

through matching orders in the exchange order book,

a trade is conducted.

At that point the price of the coin is determined

until another trade is executed at a different price.

In other words,

the price of the most recent trade is considered the current price

on the exchange.

A decentralized exchange on the other hand,

doesn’t have an order book.

Users don’t trade with one another,

they trade within a liquidity pool.

And instead of using the last trade to determine the price,

a mathematical formula is used.

This formula, or algorithm, is called an Automated Market Maker

or AMM for short.

Uniswap uses an AMM called “Constant Product Market Maker Model”

to determine the price of coins on its exchange.

This AMM follows a simple formula of X times Y equals K.

This means that when trading, for example, Ether for DAI

the amount of Ether available times the amount of DAI available

on Uniswap’s Ether/DAI liquidity pool should always equal a constant number.

Let’s break this down a bit further.

Imagine there are 10 ETH and 10,000 DAI on a certain liquidity pool.

As we can see, using the AMM model

this means that the number of ETH

times the number of DAI equals 100,000, this is our constant K.

If I were to buy 1 ETH,

this will reduce the number of ETH in the pool to 9.

Now the question remains, how many DAI will this cost.

Well, the way to calculate this is to take our constant of 100,000

and divide it by the new number of ETH, 9.

This would give us the new number of DAI required in our pool - 11,111.

Meaning we need to deposit around 1,111 DAI to buy one ETH.

As you can see the price is determined

by how much of a certain token you want to buy,

and not by how much someone else wants to get for it.

By using the “Constant Product Market Maker Model” algorithm,

liquidity is kept without the need for external market makers,

no matter how large the order size or how tiny the liquidity pool.

This model makes it infinitely expensive

to consume the whole amount of a certain coin,

putting a damper on larger orders.

For example, In our previous exercise,

if I wanted to buy 9 ETH it would cost me 90,000 DAI

to maintain the 100,000 constant,

making each ETH cost 10,000 DAI instead of the 1,111 DAI it would cost

to buy only 1 ETH.

Of course there are other DEXs with different AMM algorithms

than the one used on Uniswap,

but that conversation goes beyond the scope of this video.

Now that we’ve covered DEXs

we can focus on Uniswap more in depth.

Uniswap is a DEX built on top of the Ethereum network infrastructure.

It’s a set of automated rules used for trading ERC-20 tokens,

which is a term given to a certain standard of Ethereum tokens.

Uniswap is the most popular decentralized application, or DAPP,

on the Ethereum platform

with hundreds of thousands of users trading on it each week.

Additionally Uniswap is one of the most forked projects

in the DeFi space,

meaning people use its code to build additional applications.

The first version of Uniswap started out in November of 2018.

Uniswap’s V1 allowed trading of any ERC-20 token to Ether and back.

In May of 2020 V2 was released

and the trading of ERC-20 tokens directly between one another

without first having to trade with Ether became available.

In May of 2021 V3 was released

allowing a more effective use of capital

to whoever decides to supply liquidity to Uniswap.

In other words

you can squeeze more “juice” out of the money you deposit

in the liquidity pool.

Trading also got more efficient,

lowering trading costs compared to V2.

Additional changes which we won’t go into in this video

include concentrated liquidity, active liquidity, range orders,

flexible fees and more.

So how do you actually use Uniswap?

Well, it’s fairly simple,

all you need is an Ethereum wallet like Metamask

which can interact with other Ethereum applications.

Once you have Metamask installed on your browser,

head over to Uniswap.org, click on “Connect Wallet”,

choose “Metamask”

and now you can start trading any Ethereum ERC-20 token

that is listed.

Keep in mind that since there are many people conducting trades

on Uniswap simultaneously,

the price shown when you place your order

may be different from the actual price when the order is executed.

This phenomenon is called “Slippage”

and you are able to cap how much slippage

you are willing to tolerate before cancelling your order.

The reason for slippage is that

every trade on Uniswap is actually an Ethereum transaction

and it can take some time to broadcast the transaction

and get it confirmed by the Ethereum network.

By the time the transaction is confirmed,

the price may have already changed.

Due to its decentralized and non-regulated nature,

Uniswap supports many types of ERC-20 tokens.

In fact, practically anyone can create their own token

and list it on Uniswap for free,

filling Uniswap with a wide variety of tokens

but unfortunately a fair number of scam coins as well.

Just because a coin is listed on Uniswap

doesn’t mean it’s legit or has any intrinsic value.

As opposed to a traditional exchange

that does extensive due diligence and research on every coin

it adds to its platform , Uniswap doesn’t.

So - it’s up to you to Do Your Own Research as they say

and decide if you want to invest in a certain coin.

Finally, let’s talk about the UNI token.

A coin that has gradually made its way to the list of top cryptocurrencies.

In September of 2020

Uniswap introduced the UNI token through an airdrop.

Meaning, each person who previously used Uniswap

received 400 UNI tokens for free.

Even though the UNI token has risen substantially in value

since its release,

it wasn’t designed to serve as a currency.

It’s actually a governance token,

allowing whoever holds it to influence and vote on development decisions.

The more tokens you hold, the more voting power you have.

The idea is for the Uniswap team to gradually fade out their involvement

in Uniswap

and leave the management of the project to the token holders.

So how is it that a token

that wasn’t meant to have any value rose to the top of the cryptocurrency list?

Well…it seems that the price of UNI

represents how valuable people believe that Uniswap will be in the future,

and therefore are willing to pay to be a part of its governing body.

In the cryptocurrency space

it’s not uncommon for coins

that never had any intention of being used as a financial asset

to become very valuable.

In the end it’s up to you to decide

if being a part of the Uniswap governing body

is worth the price of the UNI token.

That’s it for today’s episode of Crypto Whiteboard Tuesday.

Hopefully by now you understand what Uniswap is -

a decentralized exchange

that allows users to trade any ERC-20 token

without any intermediary.

You may still have some questions.

If so, just leave them in the comment section.

Finally, if you’re watching this video on YouTube,

and enjoy what you’ve seen,

don’t forget to hit the like button,

subscribe to the channel

and click that bell

so that you’ll be notified as soon as we post new episodes.

It really helps us out a lot.

Thanks for joining me here at the Whiteboard.

For 99bitcoins.com,

I’m Nate Martin, and I’ll see you…in a bit.