DeFi Token Spotlight: Uniswap
A Detailed Dive into one of the original Automated Market Makers
The key characteristics of DeFi
Uniswap: The Automated Market Maker that Brought Attention to DeFi
Avalanche at a Glance
Co-Founded by Anatoly Yakovenko in 2017, Solana is a high-performance, permissionless layer 1 blockchain that aims to achieve scalability through implementing several novel design mechanisms. Existing blockchains, such as Ethereum, can only process 15 transactions per second. This limitation often results in a congested network, and the ramifications are exponentially rising transaction fees as well as slowed confirmation time on transactions. Solana’s goal is to solve these issues by implementing several unique designs.
Solana has 8 key innovations that allow it to perform as one of the fastest, cheapest blockchains despite rising demand and usage. The in-depth analyses of these innovations can be found here, written by Anatoly Yakovenko. Solana differs from Ethereum starkly and requires a different programming language to build on. This means all new infrastructure must be developed from the ground up, something Ethereum began in 2014.
In summary, these innovations allow the current state of Solana to sufficiently process 2,000+ transactions per second, without the threat of exponential rising transaction fees. In time, as processing chips become more advanced due to Moore’s Law, the Solana network’s throughput capabilities will tenfold, allowing it to potentially achieve 50,000+ transactions per second.
In 2021, Solana saw exponential growth within several key areas. This growth can be seen by the increase of wallet address, Total Value Locked (TVL), and Solana’s market capitalization.
Uniswap at a Glance
In 2018, Uniswap was founded by Ethereum co-founder Hayden Adams. Adams put together a prestigious programming company, Uniswap Labs, to lead the development of the Uniswap Protocol. One of the most innovative financial applications in crypto, Uniswap, is the originator of the Automated Market Maker design mechanism. Uniswap is a decentralized exchange (DEX) that facilitates the peer-to-peer transaction of cryptocurrencies. Built on Ethereum, Uniswap is a pivotal development within decentralized finance (DeFi) and contributed significantly to the explosive growth seen during the DeFi Summer 2020 bull run.
Traditionally, markets utilize a central limit order book with bids and asks to exchange assets. This system is what is seen in the stock market, where buyers and sellers create orders by price and size that are filled as demand fluctuates. Uniswap developed a program known as an Automated Market Maker (AMM) utilizing smart contracts on Ethereum. Programs are instructions or executable scripts that are written in a programming language, in this case Solidity.
AMMs are commonly referred to as liquidity pools and consist of two tokens with an equal split of 50/50 deposited from each token. Liquidity pools replace the need for buy and sell orders, creating a constantly liquid market for users to exchange with. When one of the tokens is exchanged for the other, the relative prices of each token change and a new market rate is determined for each token. This creates an arbitrage opportunity where the price of the tokens in the pool has a slightly different price than the tokens priced on centralized exchanges. Arbitrage traders are then encouraged to take advantage of this opportunity, which helps bring the pools’ balance back to equilibrium. Each swap that takes place using a Uniswap liquidity pool has a transaction fee associated with it that is redistributed back to Liquidity Providers (LPs).
Liquidity Providers and Liquidity Mining
Liquidity Providers (LPs) are individual users who supply liquidity for AMMs and in return receive a % fee for the volume transacted within that specific pool. LPs are required to pair two tokens together, to create an LP token. LP tokens are a representation of a user’s portion of the tokens within a liquidity pool. These LP tokens are used to redeem the original tokens deposited by the Liquidity Provider. They are yield bearing assets that generate yield through transaction fees and liquidity mining.
Liquidity Mining is a term used to describe when DeFi protocols allocate a portion of their token supply to reward liquidity providers. This portion of tokens is slowly dripped out to LPs overtime in return for their liquidity provided to help facilitate trades between tokens. Creating a sustainable tokenomics that is not over inflationary and correctly incentivizes users and accrues value for users’ overtime is vital to success in this industry.
The main governance token used to decide the future development of the protocol is UNI. Governance proposals can be created by UNI holders to decide, implement, or fund developments, such as how UNI tokens should be distributed to the community and developers, as well as the fee structure of the Uniswap liquidity pools. UNI holders can then vote on these proposals and either approve the changes or veto them. One of the most notable proposals was the v3 upgrade. This improved the AMM mechanism, allowing LPs more flexibility in their liquidity providing.
The Uniswap Protocol has managed to achieve big milestones, being ranked in the Top 10 of all DeFi protocols and attracting almost $8 Billion in Total Value Locked (TVL) within its liquidity pools. Currently, Uniswap is the #1 DEX in 24-hour volume. Its liquidity pools transact roughly $1.5 Billion daily and are responsible for more than 25% of all the volume on DEXs of all blockchains in crypto.
FEATURED EDUCATION
DeFi 101: A Guide to Decentralized Finance
Decentralized Finance, or DeFi, has been rapidly gaining traction amongst the investment community. DeFi protocols, like Solana, Chainlink, or Uniswap, have real-world utility (and revenues) that are quickly displacing their traditional counterparts that require intermediaries to function.
In this digital resource, we’ll cover:
