What is Uniswap?

Aug 26 2020 - TBCT News

What is Uniswap?

Uniswap is a protocol on Ethereum for swapping ERC20 tokens without the need for buyers and sellers to create demand. It does this via an equation that automatically sets and balances the value depending on how much demand there is.

In brief
- Uniswap is an Ethereum based exchange that allows anyone to swap ERC20 tokens.
- Traditionally token swaps require buyers and sellers to create liquidity, Uniswap creates markets automatically.
- Uniswap was designed to help solve decentralized exchanges' liquidity problems.

Decentralized exchanges solve many of the problems of their centralized counterparts including the risk of hacking, mismanagement, and arbitrary fees. However, decentralized exchanges have their own problems, mainly lack liquidity–which means a lack of amount of money sloshing around an exchange that makes trading faster and more efficient. That's where Uniswap comes in. It's trying to solve decentralized exchange's liquidity problem by allowing the exchange to swap tokens without relying on buyers and sellers creating that liquidity.

Who Invented Uniswap?

Uniswap was created by Hayden Adams who was inspired to create the protocol by a post made by Ethereum founder Vitalik Buterin.

What’s so special about it?

Uniswap’s main distinction from other decentralized exchanges is the use of a pricing mechanism called the “Constant Product Market Maker Model.” 

Any token can be added to Uniswap by funding it with an equivalent value of ETH and the ERC20 token being traded. For example, if you wanted to make an exchange for an altcoin called Poop Token, you would launch a new Uniswap smart contract for Poop Token and create a liquidity pool with–for example–$10 worth of Poop Token and $10 worth of ETH. 

Where Uniswap differs is instead of connecting buyers and sellers to determine the price of Poop Token, Uniswap uses a constant equation:  x * y = k.

In the equation, x and y represent the quantity of ETH and ERC20 tokens available in a liquidity pool and k is a constant value. This equation uses the balance between the ETH and ERC20 tokens–and supply and demand–to determine the price of a particular token. Whenever someone buys Poop Token with ETH, the supply of Poop Token decreases while the supply of ETH increases–the price of Poop Token goes up.

As a result, the price of tokens on Uniswap can only change if trades occur. Essentially what Uniswap is doing it balancing out the value of tokens, and the swapping of them based on how much people want to buy and sell them.

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