Uniswap is the first automated market-making trading protocol built on the Ethereum blockchain.

Vision:

To establish a trustless and highly decentralized financial infrastructure.

Market Need:

In the blockchain world, theres a need to reshape centralized business models in a decentralized manner, with exchanges being just one part of this; meanwhile, centralized exchanges face risks such as regulatory control, hacking, exchange theft, and more, especially since asset control does not reside with regular users. For the concept of disintermediation and no reliance on third parties, decentralized exchanges are an essential component of a more encrypted world. Before Uniswap introduced the Automated Market Maker (AMM) model, Decentralized Exchanges (DEXs) continued using traditional order book and over-the-counter (OTC) market-making models, which could not support large user volumes in terms of trading speed and depth, and lacked incentive mechanisms.

Solution:

Uniswap is an Ethereum-based protocol designed to facilitate automatic token swaps between ETH and ERC20 tokens (after the release of version V2, it supports any ERC20 token pair). Fully deployed on-chain, individual users can freely deposit tokens for trading, withdraw them, without the registration, identity verification, and withdrawal restrictions found in centralized exchanges.

Uniswap allows any individual user to issue ERC20 tokens on the platform and create corresponding liquidity pools. When a liquidity pool for an ERC20 token (an ETH-ERC20 or ERC20-ERC20 trading pool) is created, the platform encourages all participants to trade within the same pool and grants the first liquidity provider to the contract the right to set the initial exchange rate between the ERC20 token and ETH (or another ERC20 token), along with all transaction fees (0.3% of trading volume). When the pool’s exchange rate diverges from broader market rates, arbitrageurs can equalize these discrepancies, bringing the rate back into alignment. Subsequently, all liquidity providers use the initial exchange rate at the time of their deposit as the basis for equivalence calculations.

Features:

Uniswap includes two types of smart contracts:
Trading Contracts: Each trading contract supports one ERC20 token, holding a certain amount of ETH and the supported ERC20 token. Trading contracts also enable direct trading between one ERC20 token and another ERC20 token.
Factory Contract: Used to deploy new trading contracts. Any ERC20 token not yet traded on Uniswap can be issued by deploying a trading contract through the factory contract.

Liquidity in Uniswap:
Uniswap leverages the liquidity in reserves to facilitate digital asset trading on the protocol. The reserves in trading contracts are provided by many “liquidity providers” who deposit equivalent amounts of ETH and ERC20 tokens. The first liquidity provider to contribute to a contract has the right to set the initial exchange rate. When there is an arbitrage opportunity, arbitrageurs will equalize price differences across markets.

Liquidity Providers Capture Transaction Fees:
After adding liquidity to the Uniswap pool, liquidity providers receive "liquidity tokens" based on their share of the pool. These tokens represent the liquidity provider’s stake. If someone adds more liquidity, new tokens are minted; if someone removes liquidity, the minted tokens are burned, keeping each liquidity provider’s relative share consistent. Liquidity providers earn from transaction fees, currently 0.3% of trading volume, which is distributed proportionally among them.

Technical Features:

The Uniswap Automated Market Maker (AMM) model involves placing a fixed quantity of two crypto assets in a smart contract, which automatically calculates the token trading price based on the AMM algorithm. The key aspect of this algorithm is that the product of the quantities of the two assets being exchanged remains constant, known as Constant Product Market Making. This is represented by the formula x * y = k, where x and y are the token quantities in the liquidity pool, and k is the product. To maintain a constant k, x and y must move inversely. Simultaneously, liquidity providers who supply liquidity to the AMM might see the value of their staked tokens decrease, a risk known as Impermanent Loss. In simple terms, impermanent loss is the difference in value between holding tokens in the AMM versus holding them in one’s wallet. It occurs when the price of tokens in the AMM deviates in either direction. The greater the deviation, the larger the impermanent loss.

Incentive Mechanism:

The initial Uniswap liquidity mining program launched on September 18, 2020, at 08:00 UTC+8. Phase one ran until November 17, 2020, at 08:00 UTC+8. Four liquidity pools on Uniswap v2 – ETH/USDT, ETH/USDC, ETH/DAI, and ETH/WBTC – supported UNI mining. Each pool received a total of 5,000,000 UNI, allocated proportionally to liquidity providers. That equates to 83,333.33 UNI per day per pool. These UNI rewards were not subject to a lock-up period.

Token Distribution and Vesting:

Initial Issuance:
15% for community airdrop;
2% for liquidity mining.
(Community Airdrop: 15% of the initial UNI token supply was distributed to the Uniswap community via an airdrop, with 10.06% going to historical users, 4.92% allocated to existing liquidity providers (based on past contributions), and 0.02% available to legacy SOCKS users.)

Liquidity Mining: Uniswap distributed an additional 2% of the UNI token supply to the community through liquidity mining. Anyone could farm UNI tokens by providing liquidity to one or more of the four pools: USDT/ETH, USDC/ETH, DAI/ETH, and WBTC/ETH (more pools may have been added after 30 days). From September 18, 2020, to November 17, 2020, 5 million UNI were allocated to each pool and distributed to liquidity providers based on their contribution.)

Release Over Four Years:
The governance treasury will hold 43% of the UNI supply;
Team members and future employees will receive 21.51% of the UNI supply;
Investors (i.e., early venture investors in Uniswap) will receive 17.80% of the UNI supply;
Advisors will receive 0.69% of the UNI supply.
(An exact vesting schedule was not publicly disclosed.)

Security Audit:

From January 8 to April 30, 2020, a team of six engineers audited the Uniswap V2 smart contracts. (This team previously handled the development and formal verification of MakerDAO’s smart contracts and completed the implementation and formal verification of Multi-Collateral Dai.)

Market Perspective:

The perceived value of UNI essentially stems from Uniswap’s leading position in the DEX space. Although UNI is a governance token, it holds potential for future possibilities.

Risks:

Significant selling pressure from the team and investors, the risk of impermanent loss with AMM, and contract vulnerability risks.

Value Judgment:

Currently, UNI only serves a governance function as a governance token. All trading fees generated on Uniswap are not used to burn UNI nor given to UNI holders.

The current fees on Uniswap are primarily captured by liquidity providers. Currently, liquidity providers not only capture all transaction fees but also receive UNI token incentives for providing liquidity to the four main trading pairs.

In the short term, according to governance proposals, some of the Uniswap protocol’s transaction fees may be allocated to UNI, allowing UNI to capture part of the fee value, thus stabilizing its price support.

Long-term, to align the interests of liquidity providers and token holders, so that UNI captures the full fee value, while liquidity providers earnings are realized through UNI itself. This would benefit liquidity providers, UNI holders, the project, ecosystem partners, and others. However, achieving this scenario requires community effort and progress from various angles, which may be difficult to accomplish in the short term. What can be achieved sooner is allocating a portion of the transaction fees to UNI token holders.