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Uniswap (UNI)
What is Uniswap?
Uniswap is a completely different decentralized exchange protocol built on Ethereum. It uses a relatively new type of trading model called an automated liquidity protocol. This protocol was created by Hayden Adams in 2018 and was built on top of the Ethereum blockchain. Uniswap does not have an order book and allows users to trade without intermediaries, with a high degree of decentralization and censorship-resistance. It even allows users to list tokens on the exchange for free. Notable difference is that the traditional centralized exchanges are profit-driven and charge very high fees to list new coins, unlike Uniswap.
How does Uniswap work?
Uniswap runs on two smart contracts:
- “Exchange” contract
- “Factory” contract
These are automatic computer programs that are designed to perform specific functions when certain conditions are met. In this instance, the factory smart contract is used to add new tokens to the platform and the exchange contract facilitates all token swaps, or “trades.”
Automated liquidity protocol
The way Uniswap solves the liquidity problem of centralized exchanges is through an Automated liquidity protocol. This works by incentivizing people trading on the exchange to become liquidity providers.
Basic actions that are executed while using Uniswap are:
- Uniswap users pool their money together to create a fund.
- Each token listed has its own pool that users can contribute to, and the prices for each token are calculated using a mathematical algorithm run by a computer.
- Users can execute any trade instantly at a known price provided there’s enough liquidity in the particular pool to facilitate it.
- In exchange for putting up their funds, each LP receives a token that represents the staked contribution to the pool.
- Uniswap charges users a flat 0.30% fee for every trade that takes place on the platform and automatically sends it to a liquidity reserve.
Benefits of using Uniswap
- Easy to access the crypto market.
- New tokens that can directly access liquidity.
- Liquidity providers get profit by simply putting their funds into the liquidity pool.
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