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Video: What is UNISWAP? Analysis of the hottest DEX in the summer of 2020.



Hello everyone, welcome to the blockchain big cousin channel, I am Camille. In the summer of 2020, DeFi continued to detonate, and the decentralized exchange Uniswap became popular in the entire industry. It is no exaggeration to say that Uniswap can now be regarded as the biggest opponent of the centralized trading platform, with a transaction volume of more than 400 million US dollars within 24 hours. Surpassing Coinbase Pro, one of the largest centralized exchanges in the United States. So today, I will introduce to you what Uniswap is, and what is unique about it? Can it maintain its rapid momentum and cannibalize traditional centralized exchanges?

?️ Uniswap - a practice exercise for half-way monks

Two years ago, after Hayden Adams was laid off, he should not have imagined the popularity of DeFi and the amazing liquidity of Uniswap at this time. Uniswap was the first official program he wrote to teach himself programming.

2017 coincided with the ICO frenzy, and the founder of Uniswap, who was a mechanical engineer at Siemens at the time, Hayden Adams was laid off.

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At this time, a friend of his who worked at the Ethereum Foundation advised him that mechanical engineering was originally a profession to persuade him to quit, and blockchain was the future, so he should try to write smart contracts on Ethereum.

Hayden Adams was finally successfully preached and spent two months learning the Solidity language from scratch - the language for developing smart contracts on Ethereum. At that time, Vitalik posted a post on reddit about the idea of a decentralized exchange mechanism, and Hayden Adams was inspired to start writing Uniswap. At the end of 2017, Uniswap's code contract, website, etc. completed the initial design. This programming exercise received a bounty from the Ethereum Foundation.

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Uniswap has officially started to emerge, especially in 2020, Uniswap has become a dark horse in the DeFi wave.

?️ What is Uniswap?

Uniswap is a decentralized exchange (DEX). The most important part of the financial market is the exchange. It provides a suitable place for transactions, whether it is the traditional financial Shanghai Stock Exchange, Shenzhen Stock Exchange, Nasdaq or the currency circle. Huobi and Binance, they all have a feature of centralization, that is, users host their assets on the exchange, and the exchange matches the transaction. The decentralized exchange (DEX) Uniswap does not require KYC and asset custody. Through the unique market maker mechanism, users can directly trade through the wallet.

Uniswap is a token exchange protocol based on Ethereum. It is decentralized, not only different from traditional cryptocurrency exchanges, but also different from ordinary decentralized token exchanges. Uniswap is a set of contracts deployed to the Ethereum network, and all transactions are carried out on the chain.

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Like other DEXs, it can freely deposit tokens for exchange, and can be withdrawn freely, without the registration, identity verification and withdrawal restrictions of centralized exchanges. At the same time, compared with other DEXs, its gas utilization rate is higher, so the gas fee is cheaper; its counterparty is not other trading users, it trades with the token pool, and has an automatic market-making model to Calculate the transaction price.

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Compared with centralized exchanges, Uniswap does not require KYC and asset custody, as long as there is a wallet, tokens can be used for direct transactions.

?️ Uniswap's market maker mechanism

Ordinary exchanges have the concept of limit orders, and general market makers will set prices when providing liquidity, but these are not available in Uniswap. In Uniswap, market makers only need to provide token funds, and the rest can be solved through mechanisms.

Let me give you a traditional example: on a typical traditional exchange like  OKEx , market makers often provide different liquidity at different prices. Suppose a trader has $1000 and 10 ETH on hand. He might place buy orders for 5ETH at $80 and 10ETH at $60. At the same time, he might place a sell order for 4ETH at $120 and 6ETH at $140. They will choose to make the market at various price levels that they are happy to trade. Collectively, all traders' pending orders make up the exchange's limit order book. As the market rises or falls, the trader may or may not make a deal at the price he specifies. Generally speaking, the "quote" of ETH is the middle value of the highest buy order and the lowest sell order.

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Now suppose that OKEx pools everyone's buy and sell orders into two large trading pools - it is conceivable that some traders may not like this approach. They don’t want their orders to be mixed with other people’s, or to have OKEx execute trades on their behalf at arbitrary prices.

What Uniswap has to do is to mix the tokens together, and at the same time, the market maker does not need to specify the price at which it wants to buy and sell. Why did Uniswap do this? This stems from the design of Uniswap’s automated market makers.

Ordinary exchanges need a counterparty. By setting the buying price and selling price, the market maker provides liquidity for the market and obtains the spread of the transaction. These set prices form a limit order.

One of the characteristics of Uniswap is to pool everyone's liquidity together, that is, to mix tokens together, and at the same time, market makers do not need to specify the price at which they want to buy and sell. And make the market according to a certain deterministic algorithm.

The algorithm is called an "Automated Market Maker" (AMM), and it quotes prices to end users based on certain predefined rulesets. Take a very simple AMM example: some kind of trading robot (bot) strategy will base on the median market price, provide buy orders and sell orders (above $1) for every $1 (below $1), and follow the Market changes constantly modify orders.

AMMs are not rigid, and different algorithms have trade-offs. The automatic market-making model adopted by Uniswap is a variant based on the "Constant Product Market Maker Model". ) One of the great features of this type of AMM is that it can provide liquidity no matter how large the order book size, or how small the liquidity pool is. The trick here is to incrementally increase the price of the token as the amount of demand (buy orders) increases. While this isn't very friendly to larger orders, the system never has to worry about illiquidity and it works effectively almost all the time.

Compared with regular limit order book based exchanges, Uniswap's mechanism is much more complicated. The premium also makes large deals prohibitively expensive. So what good is it really?

First of all, small users can also act as market makers, but they can simply deposit ETH or ERC20 tokens in the liquidity pool, and then they can get a commission of about 0.3% of the transaction fee. Before this, many ETH or ERC20 token holders could only wait for the currency price to appreciate, and the emergence of decentralized exchanges such as Uniswap allowed token holders to earn a certain amount of interest.

This has completely revitalized the encrypted assets that were quietly lying in the wallet, and this DeFi bull market has also been ignited to a certain extent by this.

According to CoinGecko data, Uniswap’s trading volume exceeded $1 billion in June and reached $4.5 billion in July. On August 30, Uniswap’s trading volume surpassed that of Coinbase. On September 1, DEX data showed that Uniswap’s August trading volume reached $6.5 billion.

Generally speaking, Uniswap gathers all tokens/funds together, and the pooling of liquidity solves the problem of order depth, and there is no longer a large bid-ask spread. Small to medium traders who don't want to deal with limit orders will appreciate this. On Uniswap, there are no pending buy or sell orders, and no heavy calculations. Liquidity providers can also do it once and for all, and the overhead of order and position management is also significantly reduced. This is a Buddhist way of providing liquidity and earning fees.

Uniswap also breathes life into transactions between dApps (or between computer devices). In a world of millions of microtransactions, it makes more sense to tap into a giant pool of liquidity than to have to watch out for a liquidity demand at a specific price. Boosting the best offer for small orders becomes risk-free.

From the current point of view, Uniswap has the opportunity to become one of the important Lego in the DeFi world, providing assistance for the development of the entire DeFi field. If you are interested in Uniswap's "constant product market maker model", I will tell you another episode. Well, that's all for today's show, thank you for watching, big cousin of blockchain, blockchain has solutions.


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