Uniswap is a renowned decentralized exchange (DEX) protocol operating on the Ethereum network. It distinguishes itself as the largest DEX and embraces an open-source approach while utilizing an automated liquidity protocol.

One notable aspect of Uniswap is its user-friendly nature, allowing individuals to list their tokens without any fees. New users can swiftly grasp the platform's functionality and commence token swapping without the need for registration.

Hayden Adams, formerly an engineer at Siemens, launched Uniswap in November 2018. The protocol underwent a significant update with the introduction of Uniswap V2 in May 2020. This update eliminated the requirement for depositing digital asset pairs into liquidity pools, enabling direct swaps between ERC20 tokens while reducing transaction volume and gas costs.

In September 2020, Uniswap unveiled its governance token, UNI. Furthermore, the release of Uniswap V3 in May 2021, available on Ethereum's layer 1 and Optimism's layer 2, introduced features like concentrated liquidity and multi-fee tiers. Traders utilizing Uniswap have complete control over their funds and do not risk losing their assets since they retain full custody.

Uniswap supports a range of Ethereum-compatible wallets, including MetaMask. According to DappRadar, as of November 2021, Uniswap boasts a total value locked exceeding $10 billion.

The growing decentralized finance (DeFi) ecosystem strives to replace centralized intermediaries in financial applications, such as loans, insurance, and derivatives, with decentralized and non-custodial financial products.

Uniswap serves as a prime example of a core product within the DeFi ecosystem, known as a decentralized crypto exchange or DEX. DEXs aim to address the issues associated with centralized exchanges, including the risks of hacking, mismanagement, and arbitrary fees. However, decentralized exchanges face their own challenges, primarily the lack of liquidity, which refers to the scarcity of funds available for efficient and swift trading. Uniswap tackles this liquidity problem by enabling token swaps without relying on buyers and sellers to create the necessary liquidity.

In the following sections, we delve into the functioning of Uniswap and its emergence as one of the prominent decentralized exchanges built on the Ethereum network.

Uniswap's unparalleled qualities

Uniswap stands out with its inclusive approach, allowing the listing of any ERC20 token without the need for permission. Each token has its dedicated smart contract and liquidity pool, which can be easily created if it doesn't exist. Users can freely trade the tokens and contribute to the liquidity pool, earning a liquidity provider fee of 0.3%, by supplying an equivalent value of ETH and ERC20 tokens.

How to Earn Uniswap Tokens

Uniswap tokens are produced by contributing ETH/ERC20 tokens to a liquidity pool. When funds are deposited into the pool, a pool token is created. Pool tokens are ERC20 tokens, which means they can be freely exchanged, moved, and used in other dapps. When funds are reclaimed, the pool tokens are burned. Each pool token represents a user's share of the pool's total assets and share of the pool's 0.3% trading fee.

• When a user contributes ETH/ERC20 tokens to a liquidity pool, they receive a pool token in return. The pool token represents the user's share of the pool's total assets.

• Pool tokens are ERC20 tokens, which means they can be freely exchanged, moved, and used in other dapps.

• When a user reclaims their funds from a liquidity pool, they burn their pool tokens. This destroys the pool tokens and returns the user's ETH/ERC20 tokens to them.

• Each pool token represents a user's share of the pool's total assets and share of the pool's 0.3% trading fee. This means that when a trade is made in the pool, the user who owns the pool token will receive a portion of the trading fee.

How to Trade Ethereum (ETH) and ERC20 Tokens on Uniswap

Uniswap is a decentralized exchange (DEX) that allows you to trade Ethereum (ETH) and ERC20 tokens without the need for a centralized third party. To make your first trade on Uniswap, you will need to:

1. Connect your wallet to Uniswap. You can use a variety of wallets, including MetaMask, Coinbase Wallet, and WalletConnect.

2. Deposit ETH into your wallet. You will need some ETH to pay for transaction fees.

3. Select the tokens you want to trade. You can trade ETH for any ERC20 token that is supported by Uniswap.

4. Enter the amount of ETH you want to trade. You can also enter the amount of the ERC20 token you want to receive.

5. Confirm the trade. Once you have entered all of the information, you will need to confirm the trade.

Once the trade is confirmed, your ETH will be exchanged for the ERC20 token you selected. The transaction fee will be paid in ETH.

Your First Trade on Uniswap

Using Uniswap, you have the ability to buy ether (ETH) as well as numerous ERC20 tokens supported on the platform. To proceed, it is necessary to have some ETH in your account to cover transaction fees and a suitable asset to exchange for the desired ERC20 token. This asset can be either ETH or another ERC20 token. For instance, if you wish to trade USD Coin (USDC) for UNI, you will need to hold USDC in your wallet along with some ETH to cover the transaction fee.

In the following guide, we will walk you through the process of executing your first trade on Uniswap, specifically purchasing UNI tokens using ETH.

1. Begin by accessing the Uniswap exchange platform. Locate the 'Connect to a wallet' button in the top right corner and select the desired wallet for trading. Options include MetaMask, WalletConnect, Coinbase Wallet, Fortmatic, or Portis Wallet

2. After successfully logging in, you will be presented with the trading interface. At the top field, choose the token you want to trade for the desired token. For instance, select ETH. In the bottom field, either search for the token you want to purchase or choose it from the drop-down menu, such as UNI in this scenario.

3. Now it's time to configure your order. You have two options:

• Determine how much you want to spend by entering a specific amount in the top field.

• Decide how much you want to buy by entering a specific quantity in the bottom field.

4. At the bottom of the order menu, you will find the estimated amount you will receive for your transaction. If you are satisfied with the provided figures, simply click the 'Swap' button to proceed with the transaction.

Once you click 'Swap', your wallet will prompt you to confirm the trade. You may also have the option to adjust the transaction fees to a value that suits your preference. After confirming the transaction, it will be processed, and once completed, your tokens will be visible in your ERC20 wallet.

Further steps

After successfully completing your first trade on Uniswap, you can explore more advanced options available to experienced users.

Uniswap being an open protocol, various front-end user interfaces have been developed. For instance, InstaDApp provides a convenient way to add funds to Uniswap pools without accessing the official Uniswap interface.

Other interfaces like Zapper.fi offer the ability to add funds to Uniswap pools using ETH alone, eliminating the need for an additional token. These interfaces also provide simplified solutions for purchasing pool tokens in combination with bZx token strategies. With a wide range of official and unofficial resources available for developers to build upon the protocol, we can anticipate more integrations between Uniswap's unique token swapping system and new decentralized finance (DeFi) products in the future.

Though Uniswap launched back in November 2018, it wasn't until relatively recently that the protocol began to see significant traction.

The release of Uniswap V2 in May 2020 saw a major upgrade that allows for direct ERC20 to ERC20 swaps, cutting Wrapped Ether (WETH) out of the equation where possible. Uniswap V2 also added support for incompatible ERC20 tokens like OmiseGo (OMG) and Tether (USDT), and added a host of technical improvements that make it more desirable to use.

As liquidity mining and yield farming platforms dramatically increased in popularity in 2020, Uniswap saw a corresponding surge in interest, since many DeFi platforms allow Uniswap liquidity providers to see an additional return on their LP tokens. This, in combination with the 0.3% exchange fees distributed to liquidity providers—and the platform’s popularity as a launchpad for popular DeFi project tokens—has seen Uniswap rise the ranks to become one of the leading DeFi platforms by total value locked (TVL)—a measure of the total value of crypto assets locked up in the platform.

In May 2021, Uniswap V3 launched, with the latest iteration of the DEX adding a number of new features. First up is concentrated liquidity, which enables liquidity providers to allocate liquidity within a custom price range. That, in turn, means that traders don't have to put as much capital on the line to achieve results. V3 also adds more fee tiers, enabling traders to better determine their risk level when trading volatile assets (which can change in price between when a trade's initiated and executed). It also adds "easier and cheaper" oracles, which ensures that the DEX's price data is up to date.

Finally (and perhaps least essentially) it also generates non-fungible tokens (NFTs) based on LP positions, turning them into "on-chain generated art".

Uniswap has undergone significant developments with the introduction of Uniswap V2 and V3:

Uniswap V2, released in May 2020, brought about substantial improvements to the protocol. It enabled direct ERC20 to ERC20 swaps, eliminating the need for Wrapped Ether (WETH) in certain cases. Additionally, Uniswap V2 expanded its support to include incompatible ERC20 tokens like OmiseGo (OMG) and Tether (USDT), incorporating several technical enhancements for a more favorable user experience.

The rise in popularity of liquidity mining and yield farming platforms in 2020 propelled Uniswap's growth, as it provided additional returns for liquidity providers through LP tokens. Combined with the 0.3% exchange fees shared with liquidity providers and its role as a favored launchpad for prominent DeFi project tokens, Uniswap ascended to become one of the leading DeFi platforms in terms of total value locked (TVL) – a measure of the total value of crypto assets locked in the platform.

In May 2021, Uniswap V3 was introduced, introducing several notable features. Concentrated liquidity enables liquidity providers to allocate liquidity within a customized price range, reducing the capital required for traders to achieve desired outcomes. V3 also offers multiple fee tiers, empowering traders to manage their risk levels when dealing with volatile assets whose prices can fluctuate during trade execution. Furthermore, Uniswap V3 incorporates improved and cost-effective oracles to ensure accurate price data within the DEX. Uniswap V3 introduces non-fungible tokens (NFTs) generated based on LP positions, transforming them into unique on-chain art pieces, adding an additional creative aspect to the protocol.

Introduction and Airdrop of the UNI Token

In September 2020, Uniswap introduced UNI as its governance token and initiated an airdrop of 400 UNI tokens to every wallet address that had interacted with the Uniswap protocol prior to September 1. Out of a total supply of 150 million UNI tokens, approximately 66 million tokens were claimed within the first 24 hours after the airdrop. The token distribution plan involves gradually releasing the tokens over a span of four years. In the first year, 40% of the tokens will be distributed, followed by a reduction of 10 percentage points in subsequent years until all the tokens are allocated. The distribution of 1 billion UNI tokens is divided as follows: 60% for the community, 21.5% for Uniswap employees, and the remaining 18.5% for investors and advisors.

As a governance token, UNI provides holders with voting rights in shaping the protocol's operations. It also grants ownership of various Uniswap governance components, including the UNI community treasury, the protocol fee switch, eth ENS, the Uniswap Default List (tokens.uniswap.eth), and SOCKS liquidity tokens. Following its launch, UNI was swiftly listed on Coinbase Pro and subsequently on the main Coinbase exchange.

Uniswap's introduction of the UNI token can be seen as a strategic response to the emergence of SushiSwap, a protocol clone that introduced its own token to incentivize usage. In a more direct challenge, SushiSwap attempted to drain Uniswap's liquidity through a process known as "vampire mining."

Latest Breakthroughs

Uniswap V2 has experienced extraordinary growth in less than a year, surpassing significant milestones and solidifying its position as a dominant decentralized exchange (DEX). In February 2021, Uniswap became the first DEX to process over $100 billion in trading volume, with daily trading volumes regularly exceeding $1 billion. This remarkable performance not only establishes Uniswap as the largest DEX by trading volume but also positions it among the top five most popular exchanges across the board.

During this period, the Uniswap governance token (UNI) has seen significant success, climbing to become the 10th largest cryptocurrency by market capitalization. Its value reached an all-time high of over $44, driven in part by the increasing popularity of yield farming pools that require users to hold UNI or Uniswap LP tokens.

Uniswap has also made headlines with the Unisocks (SOCKS) phenomenon, where a token backed by a physical pair of socks captured attention. While the initial pair was sold for a modest $12, an innovative sale format utilizing a bonding curve resulted in one pair being sold for an astonishing $92,000 in February 2021. However, Uniswap has faced challenges alongside its successes. The congestion on the Ethereum network has led to soaring transaction fees, making trading on Uniswap costly, especially for lower-value trades.

In response to these issues, several alternative platforms have emerged, such as TRON's JustSwap, Qtum's QiSwap, and Kyber Network. These platforms promise faster transactions, lower fees, or both. PancakeSwap, a similar automated market maker (AMM) built on Binance Smart Chain, briefly surpassed Uniswap in daily transaction volume.

Nevertheless, Uniswap's prominent position as a leading DEX grants it significant influence. As the DeFi sector expands and inevitably faces regulatory scrutiny, some members of the Uniswap community have proposed the establishment of a "political defense" fund. This fund, supported by a budget of 1-1.5 million UNI, aims to proactively address regulatory and tax threats through legal efforts, lobbying, and organization. By countering the "massive spending from traditional finance players," this initiative seeks to safeguard the burgeoning DeFi space.

With regulatory bodies like the SEC and CFTC now turning their attention to DeFi, Uniswap faces potential challenges and the need to navigate a changing regulatory landscape.