Buy Uniswap (UNI)
On September 16, 2020, the decentralised exchange Uniswap launched its token of the same name, which rose to 26th place in the cryptocurrency capitalisation ranking in just 24 hours. At the time of writing, the cryptocurrency is already in 9th place in terms of market capitalisation and has risen in value by 7618%.
This article will look at information about a young cryptocurrency that increasingly attracts investors' attention and desire to buy UNI.
What is Uniswap?
Uniswap is an open-source protocol built on the Ethereum blockchain. It provides a unique solution to facilitate the exchange of ERC-20 tokens without any centralised third parties. This means that users manage their funds and are not dependent on any centralised resources.
However, the lack of liquidity, i.e., insufficient funds flowing through the platforms, has prevented these decentralised exchanges from becoming popular among liquidity providers.
However, Uniswap varies from the other exchanges. It does not use an order book to determine prices. Instead, the protocol works based on an equation, where total liquidity is a constant in the pool.
For the model to work, it considers sources of liquidity. In this way, it creates a pool that supports decentralised trading and lending. The process involves listing and swapping ERC-20 tokens without an order book.
How does Uniswap work?
If you are planning to buy Uniswap, you should know how Uniswap works. The more information you have about the product you buy, the more chances you will invest in Uniswap and get a return on your investment.
The Uniswap protocol was inspired by Vitalik Buterin's automated market maker (AMM) concept. Uniswap primarily uses the Constant Product Market Maker Model mechanism, a variant of Automated Market Making (AMM), which contains liquidity pools for traders.
Subsequently, in May 2020, Uniswap introduced an updated version, Uniswap V2, along with liquidity pools. Unlike its predecessor (V1), users can now swap ETH and ERC-20 tokens, while V2 uses wrapped ether (wETH) in the central contracts, where users can combine ERC-20 tokens directly with any other ERC-20 tokens. In addition, the prices have become more reliable and harder to manipulate.
How does Uniswap make money?
Uniswap does not profit from end-user commissions, trades or any other means commonly referred to in the world of blockchain technology. Instead, the commissions paid by users are rewards for liquidity providers.
Liquidity providers receive 0.3% of the commission charged by the pool contract per transaction. However, the commission is calculated in proportion to each provider's contribution. For example, if a liquidity provider contributes 10% to the DAI/ETH pool liquidity, it receives a 10% commission.
As a liquidity provider, you can either add this commission back into the pool to increase your profit or withdraw the funds at any time.
But how does it work?
How does a liquidity pool work? Another important point for someone looking to buy UNI.
Liquidity pools are liquidity reserves locked into a smart contract, usually funded by liquidity providers.
Stablecoins, such as USDT and DAI, are the main component of the pool. As Uniswap exists in an inclusive environment and liquidity pools are the backbone of Uniswap, it is essential to understand its fundamentals.
In principle, anyone can be a liquidity provider (LP). However, to become an LP, you need to implement the equivalent value of ETH and ERC-20 tokens to the pool.
One of the functions of AMM is that you can provide liquidity regardless of the size of the liquidity pool. In exchange, you will receive a reward in the form of liquidity tokens according to your contribution. This also means that the number of unique tokens you receive is proportional to the liquidity of the pool. These liquidity tokens are used to track your contribution to the pool, distribute transaction fees and for various uses in Defi applications (dApps).
In these liquidity pools, the total liquidity derived from the product of the two types of tokens always remains constant, following this simple equation X × Y = K, in which the total liquidity remains constant.
Let's understand how this equation works using the ETH/USDT liquidity pool as an example.
If a user buys (x) from the ETH/USDT pool, the supply of USD (y) will be greater than ETH after the transaction. When the supply of ETH is less, there will naturally be a price spike and vice versa. This is where total liquidity (k) remains constant for price determination. Generally, the larger the pool of liquidity, the easier it is to process large orders. However, slippage does occur because the x and y ratios are not in a linear relationship.
When comparing Uniswap and centralised exchanges, one finds that the former has no listing fees on Uniswap. Thus, Uniswap has quickly become one of the most popular protocols for exchanging tokens.
Interestingly, Uniswap took off when Ethereum struggled with scalability issues during the Proof of Work consensus.
In 2016, Ethereum creator Vitalik Buterin proposed creating a decentralised exchange combined with an "on-chain automated market maker". In his post on Reddit, he also shared some technical details of how this could be achieved.
A former Siemens mechanical engineer, Hayden Adams, picked up on the idea and began developing a fully functional Uniswap platform. Shortly after he pitched the idea, the project received several grants and $100,000 from the Ethereum Foundation. Soon after, the first version was officially launched in November 2018. Subsequently, in April 2019, Paradigm (a digital asset investment firm) contributed $1 million to develop Uniswap.
If you are looking to buy Uniswap, you will be interested to know that in 2019 Uniswap became the "King of DEX" and the most significant project by volume. Following the launch of Uniswap V2 in May 2020, along with the growth of Defi, the number of transactions on the Ethereum network quickly rose to the previous peak in 2017.
The Uniswap ecosystem consists mainly of 3 types of participants:
- Liquidity providers.
- Developers (who use the Uniswap functions to invent new Defi tools).
If you want to invest in Uniswap, we will take a closer look at the two main participants.
There are several types of providers:
- Passive - place their assets in liquidity pools to profit from trading commissions.
- Professional - use market-based instruments and create collections for Defi projects.
- Token projects - create a liquid market for their token.
Traders buy tokens on Uniswap, paying a special commission (currently 0.3%, the amount will change in the future), divided between the liquidity providers as a reward, in proportion to their participation in the shared pool.
Categories of traders:
- Users of dApps - buy tokens on Uniswap for use in other applications on Ethereum.
- Speculators - apply various tools and ecosystem products to exchange tokens using liquidity derived from the Uniswap protocol.
- Arbitrage Bots - profit by comparing prices and trading on different platforms; help level out token prices in the market.
- Smart contracts - execute trades on the Uniswap protocol, implementing swap functionality, such as DEX aggregators.
The activity of traders contributes to price accuracy, as through arbitrage, prices in pairs are more closely aligned with market prices.
The purpose of Uniswap tokens (UNI)
Uniswap launched its UNI management token in September 2020. Its primary purpose is to further increase the decentralisation of the protocol by offering end users more governance rights.
The main purpose of the UNI token is to allow holders to vote on various proposals and improvements to develop the platform further. This increases public trust in the Uniswap protocol and provides better protection of user funds.
In total, there are 1 billion UNI tokens online. Uniswap community members will receive 60% of all UNI tokens. Users will receive 25% of that portion (equivalent to 15% of the total). The Uniswap team and its employees, advisors and investors will receive the remaining 40% of UNI tokens over the next four years.
To receive the reward, community members must provide liquidity to one of the following pools: USDT, USD, DAY and WBTC, each of which must be paired with ETH.
Pros and cons of the exchange
Cryptocurrency community members believe that the project has both advantages and disadvantages. We propose to get acquainted with them more closely.
Advantages of Uniswap:
- The automation of the token exchange process has accelerated the speed of transactions.
- The simplicity of working on Uniswap and the open access to operations on the platform allowed the exchange to form large pools of liquidity. This approach has also had a positive impact on the speed of the platform.
- Wide choice of tokens.
Disadvantages of Uniswap:
- Due to the congestion of the Ethereum network amid the popularity of Defi, transaction fees on Uniswap often become prohibitive. Sometimes users are forced to raise the fees themselves in order to complete a transaction.
- Fraudsters use the opportunity to pour any coin into Uniswap for free and unimpeded. Failure by project representatives to check tokens for security could result in losing money by investing in a scam.
Risk of volatile loss
Liquidity providers on Uniswap should be aware of the volatile loss, which affects the amount of profit compared to the fluctuating market price of a token when liquidity is withdrawn from the pool.
For example, if a liquidity provider contributes 1 ETH and $100 (which means that ETH is worth $100) in a pool with 10ETH and $1,000, that liquidity provider now has a 10% share. However, if the price of ETH rises to USD400 and arbitrage traders flood the ETH pool with USDT withdrawals, the ratio of ETH to USDT in the liquidity provider's wallet changes, but the value remains the same.
Consequently, if the liquidity provider decides to remove liquidity from the pool when the price is high, that trader will incur a loss or, in effect, an opportunity cost. In this case, the value of ETH for USDT in the liquidity provider's wallet would change to 0.5 ETH and 200USDT instead of the original 1 ETH per 100 USDT. Thus, while it may appear that the liquidity provider has made a USD400 profit (i.e., 0.5 ETH at USD200 plus USD200), the liquidity provider has lost USD100, as the liquidity provider would have had a total of USD500 in its wallet if it had not provided liquidity to the pool.
To avoid the risk of an intermittent loss, you can read this technical explanation of how this happens; however, the best solution is to add and remove liquidity from the pool only when the token price is relatively stable.
Who is suitable for crypto trading?
Cryptocurrency attracts traders with its extreme volatility. The rate can fluctuate by tens or even hundreds of per cent per day. Sufficient trading experience + a set of proven strategies + stress tolerance = the starter kit of an ideal crypto trader. Accordingly, if you are a beginner or don't like to take risks in your trading strategies, investing in cryptocurrency is hardly a good choice.
However, we strongly advise you to at least give it a try because if you time your entry into the market correctly and consider all risk management rules, cryptocurrency trading can bring you much higher returns than traditional investments.
Cryptocurrencies can also be included in your investment portfolios alongside more traditional assets. Bitcoin investments, for example, could make you a millionaire in a few years. So don't miss out on the opportunity.
How to start investing in Uniswap in Malaysia?
So, if you want to buy Uniswap in Malaysia, choosing a reliable broker is the first of the most important actions. Then, you need to register on the broker's website. This step is mandatory. Registration takes very little time. All you need to do is some personal information so that the site can recognise you.
If you want to make a fortune, you'll need experience. And to get an experience, you need to trade, of course. But there's a great feature called the demo account. So you can experiment and trade just like with real money.
Want to invest in Uniswap in Malaysia? Do you feel empowered and eager? Then make a deposit and get started! Read the news, learn how to calculate risks and believe in your strength! Have successful trading!
The Uniswap team has created a solution that the cryptocurrency community has been waiting for a long time. Furthermore, the automated liquidity protocol, combined with the unique management system via UNI tokens, gave users confidence, increasing the usage of the platform. With Uniswap, swapping Ethereum-based tokens has become incredibly easy.
Uniswap, one of the first Defi exchanges, aims to revolutionise traditional DEX with its automated liquidity protocol. That means that Uniswap can facilitate the exchange of tokens without relying on conventional architecture with the exchange tumbler method while solving liquidity problems.
Trade and earn!