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Thinking about using Uniswap?

uniswap decentralized exchange

Uniswap in Review

Uniswap is a completely different concept from regular crypto exchanges like a Coinbase or Binance. This is of course because it is a completely decentralized crypto exchange that runs on the Ethereum blockchain. Most crypto exchanges are centralized, meaning that there is an authority that oversees development, transfers, users, and user activity.

On Uniswap, users are able to swap tokens with nothing more than an Ethereum wallet. As part of the Decentralized Finance (DeFi), Uniswap runs on the Ethereum blockchain and supports decentralized token swaps. It’s basically an interlock of computer programs along with unicorns (yes, unicorns) that make trades possible. Ethereum tokens can swap assets directly or lend their crypto to the liquidity pools and earn fees for supplying liquidity. But we’re getting ahead of ourselves – first, let’s make things clear on what a DEX, or a decentralized exchange, is.

What Are Decentralized Exchanges?

Centralized exchanges rely on the order book method to facilitate trades. Order trading resembles a menu: there is a list featuring orders and the prices for each of them. How liquid a market is depends on how many buy and sell orders are open at any given moment. Trades are executed by matching orders with the party on the opposite side of the order book. There is nothing wrong with using centralized exchanges, as they can offer a vast array of features, speed, and high trading volumes. But on the other hand, they do administer fees on transactions, ask for more personal details, and place a third party in the middle, which DEXes manage to avoid.

Decentralized exchanges, or DEX, are built on trustless protocols that do not need a middleman in order to facilitate and execute trades. It all comes down to blockchain technology and the way it functions. Engineers have had to reverse engineer the whole process in order to come up with a viable solution, where traders can swap assets and currencies with only an Ethereum wallet. Due to rapid innovation, Uniswap has grown into one of the most popular exchanges of the Decentralized Finance (DeFi) movement.

What Is Uniswap?

Uniswap is an open-source software that functions on Ethereum protocols featuring automated liquidity protocols. There is no need for an order book or intermediary approval in order to engage in market trades.

Putting it simply, liquidity, when referring to the market, is how active the market place is. You can think of it in terms of supply and demand. If a seller decides that they want to sell their tokens, a liquid market means that there are a lot of people that would pay their asking price, the regular price. If they try to sell the tokens on a less liquid marketplace, there might not be any buyers willing to pay the asking price, so they either have to lower the price, or wait for other buyers to come to the marketplace and hope that some of them would be willing to pay the asking price. 

So, the higher the trade, the more liquidity for the marketplace. The more liquidity a market has, the more stable it is, as trades do not disrupt it by going in and out. Uniswap took the concept of “supply and demand” and modified it by taking the liquidity pools out of the hands of the centralized exchange and decentralized them by placing them into the hands of the traders themselves.

Liquidity pools are generated by liquidity providers. By making use of the system’s decentralized pricing mechanism, the platform doesn’t provide listings. Instead, users are able to swap ERC-20 tokens with no need for an order book, which means that there are no listing fees. 

The only thing that is required for a trade to go through is sufficient liquidity, 

How Does Uniswap Work?

Hayden Adams is credited as the creator of the Uniswap protocol. Back in 2018, he managed to further develop Ethereum co-founder Vitalik Buterin’s technology and bypass order books by introducing an Automated Market Maker (AMM) model variant called Constant Product Market Maker.

Smart contracts are automated market makers that manage liquidity pools, which allows traders and liquidity providers to deposit tokens and digital assets in the pool. For the service to be possible, traders are subjected to a pool maintenance fee that goes to the liquidity providers based on their shares.

The liquidity providers serve as the market creators by depositing two tokens equivalent in value, or stablecoins like USDC, DAI, or USDT, to the pool. The tokens can be an ETH and an ERC-20 token or a pair of ERC-20 tokens. In exchange, the providers receive liquidity tokens, as a representation of their liquidity pool shares. The Uniswap pool has to provide consistent liquidity for trades to go through. Naturally, larger trades are more expensive than lower trades because they cause more commotion and are harder to balance out.

Uniswap v3 and Uniswap LP Tokens

Uniswap’s technology is constantly being updated and is now on its third generational iteration with Uniswap v3. The implementation of Uniswap v3 brought a whole new way of processing capital, which has made it a lot more efficient. Uniswap v3 LP positions are unique since everyone can customize the price ranges that they support, meaning that their positions are non-fungible and each position is represented by an NFT token.

Uniswap v2 tokens can be deposited as collateral through Aave as well as MakerDAO because their position cannot be customized. So what they do is provide general liquidity across the pool. This way, most AMMs are capital-inefficient because most of the assets that they store aren’t being utilized. Uniswap v3 employs those dormant assets in order to improve pool liquidity when needed. Another interesting piece of programming is that liquidity providers are able to customize the price range which they provide liquidity for, which allows for a more liquid pool in the places where trades are being executed.

How to Use Uniswap

Getting started on Uniswap isn’t difficult. Users just need an ERC-20 wallet, such as Coinbase wallet, Portis, WalletConnect, MetaMask, or Fortmatic, to store Ether on it. This way, they can cover gas fees and participate in trades. The gas fees are calculated based on the network traffic and the speed at which trades are processed and executed by miners. Most of the time, users will be given three payment speed options, ranging from slow to fast. Naturally, quicker processing comes at higher gas fees.

Does Uniswap Make a Profit?

It might come as a surprise, but all Uniswap fees go to the liquidity providers, as the platform is run by decentralized protocols. Transaction fees for liquidity providers are 0.3% on a per-trade basis. The fees are added to the liquidity pool automatically, but providers do have the option to transfer them to their balance accounts if they please.

A Few Words Before You Go…

Uniswap took the industry a step further because it welcomes virtually everyone who has an Ethereum wallet to participate in trades without a central governing party. The problem is that the mining craze on Ethereum 1.0 is killing the planet’s environment through wasteful energy spending. In any case, once Ethereum 2.0 and POS replaces POW for good, Uniswap will probably be launched to new unprecedented heights.

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What Is DeFi?

what is defi decentralized finance

What is Decentralized Finance?

DeFi is part of the new financial terminology arising from the crypto revolution that reshaped the basic operational principles of the world’s economy. DeFi stands for decentralized finance, a general term that covers a broad range of blockchain-related applications, with the single purpose of avoiding third-party intermediaries. 

This article will discuss the core features and components upon which DeFi is built. After our overview designed to help you understand the Ethereum background behind the majority of DeFi apps, there is a carefully considered list of Ethereum apps and the most popular DeFi tokens. Don’t let the high-tech framework discourage you. Once you understand the straightforward principles behind it, you will see why DeFi is considered to be the future of financing. 

How Does DeFi Work?

DeFi is a financial approach where assets are accessed through an open decentralized blockchain network. Contrary to bank or centralized exchange accounts, users aren’t by any means required to provide an ID or other forms of personal identification to access DeFi. Transactions are code-handled and open to public access. 

More precisely, DeFi is a blockchain software that enables users to connect themselves on a peer-to-peer basis and buy, sell, borrow, or lend assets without a centralized authority to facilitate the transactions. Since there is no corporate intermediary, payments can’t be blocked or denied, and neither can they be delayed or misguided due to a human factor. 

Because of its decentralized nature, Bitcoin is considered the first DeFi asset. However, it’s an inescapable fact that while cryptocurrencies have been making their way to global charts over the past decade, Bitcoin has been mainly bought and sold through mainstream centralized exchanges (CEXs). 

Etherium, on the other hand, which is the next-largest cryptocurrency, has been used for building DeFi applications, as it has proved itself to be more practical for creating other forms of decentralized apps. 

All DeFi products are in tune with Ethereum, which enables seamless cooperation in, for example, borrowing tokens from one platform and trading them on a completely different application. Plus, ETH and other tokens built on Ethereum have a shared ledger that keeps a full record of ownership, accounts history, and executed transactions. 

The easiest way to understand DeFi is by differentiating between the five component layers and the several types of DeFi apps or functionalities.

DeFi Layers 

There are five DeFi layers, each with a clearly defined objective: 

  • The settlement layer refers to the blockchain and the asset of its native protocol. The settlement layer enables the network to store all previously mentioned records securely under a predefined set of rules. 
  • The asset layer consists of all tokens that are issued on top of Ethereum, the settlement layer. It includes the native asset and all other tokens supported by the blockchain. 
  • The protocol layer’s role is to provide functionality by implementing a set of self-executing smart contracts between the two parties involved. Smart contracts ensure stable transactions between the buyer and the seller or the lender and the borrower with agreement terms directly written in code lines. The code tracks and controls the transaction securely without involving a third party or any other type of escrow service. 
  • The application layer consists of user-focused apps connecting to separate protocols. They appear in the form of online platforms like decentralized exchanges, for example, accessed through a web browser that abstracts the necessary interaction for concluding the smart contract. 
  • The aggregation layer refers to an extension to the application layer. It is also a user-oriented app that provides tracking and comparing tools, simplifying complex tasks by a simultaneous connection of various protocols, and combining relevant information more practically. Typical aggregation layer examples include lending and banking services as well as incorporated crypto wallets.           

Types of DeFi Applications

  • Decentralized exchanges (DEXs) are the most commercially spread DeFi apps. They allow users to exchange fiat money or cryptocurrencies for other cryptocurrencies such as USD for Bitcoin or Bitcoin for DAI. They are rapidly growing in popularity among the crypto community as a result of the full control and custody users have over their accounts and balances. 

Popular DEXs on the market: Changelly, ShapeShift, Bisq and Uniswap.

  • Stablecoins are cryptocurrencies that are bound to a regular currency in order to keep price balance and stability. 

Popular stablecoins on the market: Tether (USDT), True USD (TUSD), Paxos Standard (PAX), USD Coin (USDC), and Binance USD (BUSD).

  • Lending platforms use smart contracts to avoid centralized intermediaries that handle the process of lending.

Popular decentralized lending platforms on the market: InstaDapp and MakerDAO.

  • Wrapped Bitcoins (WBTC) are a method of sending Bitcoin to the Ethereum blockchain network enabling the Bitcoin to be directly used in an Ethereum DeFi system. Users can earn interest from the Bitcoin they lend through the lending platforms mentioned above.
  • Prediction markets are online spots where users can bet on the outcome of multiple upcoming events. The purpose of DeFi in such prediction markets is to offer a more practical and secure functionality without the expensive intermediary services.

DeFi Tokens

Right after cryptocurrencies, DeFi tokens have been in the spotlight of the financial ecosystem since the rapid digital transformation in 2020 that happened as a result of Covid-19. They are decentralized financial apps that run on blockchain networks, executing well-established trading practices with a decentralized approach. 

Take a look at the most popular DeFi tokens, but remember that their ranking frequently changes due to the volatile nature of the crypto market. Although HaasOnline TradeServer can monitor thousands of tokens, we’re not quite ready to fully support DeFi platforms. You can monitor tokens’ current position and compare market caps with third party tools such as DeFi MarketCap.

Aave (AAVE)

Aave is a dominant protocol utilizing an AAVE native token to ensure and handle the protocol. Aave is now in the process of migration from LEND to AAVE at a 100:1 rate, executed through the Migration Portal. 

Total Supply: 16,000,000 AAVE

Uniswap (UNI)

UNI is a native token of Uniswap, one of the leading decentralized exchanges in DeFi. It’s recognized for being a so-called “governance” token, allowing holders to vote on further developments regarding UNI’s distribution and fee schedule. This token can be earned by providing pool liquidity.  

Total Supply: 1,000,000,000 UNI

Synthetix (SNX)

Synthetix is also a widely recognized derivatives protocol supported by its native token SNX. Users can earn new derivatives known as Synths only if they stake no less than 750% of the Synths value in SNX. This proportion is referred to as cRatio allowing users to earn both native inflation and proportional rate of trading fees on Synthetix.

Total Supply: 190,075,446 SNX

Sushiswap  (SUSHI)

SUSHI is a lending protocol supported by the Sushiswap governance token. Once users link their Ethereum wallet to their Sushiswap account, they can lock the pool’s assets into a smart contract with an offered ratio of 1:1. So, if a user planned to add 4 ETH worth of liquidity to the existing SUSHI-ETH pool, they would need to convert 2 ETH  into SUSHI. Users can also leverage their earnings by providing liquidity to various supported pairs on Sushiswap.

Total Supply: 250,000,000 SUSHI

yEarn (YFI)

yEarn is an automated liquidity aggregator that allows a broad range of yield farming possibilities. This protocol is conducted by its native token YFI offering users to enhance their gains on assets through lending and trading services. 

Total Supply: 30,000 YFI

The Takeaway

We hope all this cleared up any questions regarding DeFi. It’s true, decentralized finance is still a developing part of the cryptocurrency eco-system, but its liberating approach is on a way to overpower the traditional, time-consuming, and pricey financial system. It’s definitely worth giving it a shot.