DeFi’s progress through time
In the ever-changing world of cryptocurrency and its applications, there are new and advanced developments ever so often that nothing surprises crypto enthusiasts anymore. But rarely does a protocol show up and change the landscape forever. One such protocol was Uniswap – a cornerstone project of Ethereum and Decentralized Finance. To get a clear and coherent understanding of the impact Uniswap has made, here’s a brief intro on how exchanges work.
Traditional trading and how it functions –
Exchanges such as Coinbase and Vanguard have established trading platforms that function as a middle man for users. Here’s how they work. Say a user wants to buy BTC. The order will be placed on the exchange and with the help of the order book, buyers and sellers are matched. So the price the user pays for the desired asset is something that the seller has agreed to prior to the selling action. Traditional exchanges boast a set of advantages that are quite hard to deny.
- For the execution of a trade, there are trusted middlemen or third parties who monitor the process
- These middlemen will hold all of the user’s assets to facilitate trading on the exchange
- Traditional exchanges are very well established and approve of trading cryptocurrency and stocks on the platform
- To determine the exact value of a trade, order books exist with a list of buyers and sellers
- Personal information and data is required to initiate and process trades on the platform
Although these exchanges like Coinbase, Binance, and Kraken seem pretty straightforward and simple, they come with their own set of flaws.
The Uniswap Protocol – A revolutionary in its own right
Although DeFi protocols like Uniswap solved the issue of centralized authority, there were other drawbacks in the DeFi landscape, such as the problem of liquidity and performance. And to counter these errors, the DeFi space came up with a concept known as Automated Market Makers and liquidity pools, which seemed to solve this rising dilemma. These aspects are integrated with the Uniswap protocol.
Uniswap is an automated liquidity protocol that allows the swapping of ERC-20 or ETH tokens. It is a DeFi trading platform that functions on the Ethereum Blockchain with the help of smart contracts. The highlight of the Uniswap protocol is that it creates its own liquidity, paving the way for token swaps. It is an open-source protocol with standout features that obviate the need for third parties, offer complete decentralization, security, and censorship resistance.
The workflow of the Uniswap protocol – explained
- Consider user A who wants to swap ERC-20 tokens with another user B who holds ETH. To understand how swapping works, consider this equation that underlies the functioning of this DeFi protocol – X*Y=K.
- From this equation, user A can take the place of X representing ERC-20, and B can take the place of Y for ETH. K stands for the liquidity in that particular pool, which is constant at all times.
- So when the swapping takes place, there will be more ERC-20 in the pool and less ETH, creating an imbalance.
- Now due to scarcity, the price of ETH increases, which creates the supply and demand factor that determines the prices.
- The protocol follows rudimentary tokenomics of increasing the price of a token when there is scarcity.
The extensive line-up of advantages the Uniswap DEX protocol offers
Here’s a simplified list of the benefits a protocol like Uniswap offers that has led to its sudden popularity and success
- Uniswap is a decentralized exchange (DEX), so there is no need for middlemen or third parties to hold assets. Users can have custody of their digital assets through wallets like Metamask, also known as self-custody wallets on the Ethereum Blockchain.
- Smart contracts have complete authority over the buying and selling of orders, as in they make the need for order books obsolete. The prices are determined through automated market makers.
- To use the protocol, users need not give out personal information and identity details. There is complete anonymity.
- Tokens can be swapped or exchanges through access to liquidity, which is automatically generated within the protocol.
- The trading fees on the Uniswap platform are very abated compared to its centralized counterparts.
- Users who wish to provide liquidity to a specific pool can earn LP tokens for extra perks through it.
- The Uniswap protocol is highly reliable since it utilizes smart contracts that are immutable in nature.
- The DEX also gives its users immense security because the protocol is non-custodial, and the smart contracts are regularly audited.
Features of the Uniswap Protocol that make it an expedient and sought-after platform
- Swapping – allows users to swap between ERC-20 tokens. The users will have to specify the number of tokens after which the swapping is executed.
- Flash swaps – Users can withdraw full reserves of any ERC-20 token on Uniswap, allowing arbitrage opportunities. The user at the end of the transaction will have to either pay for the withdrawn tokens or return them for a small fee.
- Oracles – The protocol is built with the price oracle functionality that gives users estimated average pricing based on token pair prices.
- Liquidity provision – Users can provide liquidity to the various pools within the protocol. The first provider will set the initial price of the paired tokens, and equal value tokens need to be deposited. For providing liquidity, LP tokens are handed out as incentives.
Infinite Block Tech’s Uniswap Clone Development Solutions
If you’re a business looking for viable opportunities in the DeFi space, building and launching a DeFi DEX protocol like Uniswap is a good place to start. With the DeFi landscape gaining increased traction over the past few months, many newcomers are looking for credible, and trusty platforms for their swapping needs, and you can be the provider of this robust platform.
Our Clone script is integrated with the latest features and functionalities, ranging from highly secured accounts, token addition, user facilities, features, a remunerative ROI model for your business, and a range of exclusive extra profits. On top of that, our Uniswap clone development process is absolutely customizable and scalable, with the added benefit of being white-label, giving you the liberty to increase awareness about your brand.