Uniswap And The UNI Token: A Beginner’s Guide

Uniswap was at the core of the meteoric rise of DeFi in 2020–2021. The most popular decentralized exchange on the Ethereum blockchain, its total value locked grew from $800 million last July to $5.26 billion today. Uniswap’s trading volume reached $650 million on July 19, 2021.

In this article, we will provide a simple explanation to how Uniswap works and what made it so popular in the community. We will explain what the UNI governance token is and how you can profit from Uniswap.

Killer features of Uniswap

Liquidity pools for efficient trading. Before Uniswap, most of the decentralized exchanges (DEXes) offered users to trade in a peer-to-peer manner, i.e. right between each other’s wallets. This added to security compared to centralized exchanges that store users’ funds, but the liquidity remained low. Uniswap was among the first DEXes to introduce liquidity pools — smart contracts where users lock their coins thus providing liquidity and get rewarded in return. Thus, technically speaking, when you swap your tokens in Uniswap, you trade with a liquidity pool, not other users directly.

Liquidity provider rewards. Whenever a trader uses a pool, they pay a 0.3% fee. This fee is proportionally distributed among liquidity providers (LPs) as a reward.

No order book. An order book is a list of ‘buy’ and ‘sell’ bids that is used by most centralized exchanges. The balance of supply and demand represented in this book shapes a token’s price. In DEXes, however, this mechanism is hard to implement since it congests the blockchain very strongly. Instead, Uniswap leverages the Automated Market Maker model — the price of an asset derives from the balance of two tokens’ supply and demand within a pool.

No listing fees. Anyone who writes a smart contract can list their token on Uniswap — there is no centralized listing process on the platform. This adds freedom and flexibility, however, one should always pay attention to choose proper assets to trade as there might be scam tokens present.

Abundance of assets. Any Ethereum-based token that has a funded liquidity pool can be traded on Uniswap. There are hundreds of assets that you can swap here.

No custody. In Uniswap, the platform doesn’t store your funds and doesn’t ask you for your private keys. There is, however, a downside to this — since every swap demands a transaction fee which can vary from $3 to $20 and more, and frequent trading is quite pricey.

Extendability and customization. Uniswap is open-source, and developers can create their versions of DEXes based on its code — this is how Sushiswap, Zuniswap, and Kingswap emerged.

What is UNI token?

UNI is the governance token of Uniswap. Although the platform was launched in 2018, UNI was only issued in September 2020. Two main reasons led to this: first, there was the voice of the community calling for better decentralization and the ability for users to govern the project. Second, Uniswap’s “fork” Sushiswap launched in August 2020 already had its governance token, and Uniswap had to keep up not to lose its dominating role. Ultimately, it didn’t.

The UNI token allows its holders to have a say in the decisions regarding the protocol changes, community events, and so on. For instance, the Uniswap Grant Program was conceived as a community initiative. Second, UNI gives the right to vote on the decisions regarding the Uniswap treasury. However, only those who own at least 1% of UNI supply can submit governance proposals, which raised concerns regarding the actual decentralization level of Uniswap.

How was UNI distributed?

1 billion of UNI tokens were minted upon its launch. Not all of them were vested at once: the team plans to do so in a 4-year span to ensure fair distribution. Of 1 billion tokens, only 587 million are currently in circulation. Overall, 60% of UNI are going to the community, while another 40% are reserved for the Uniswap team members, investors, and advisors.
Here’s how the tokens were distributed:

1. Anyone who used Uniswap before September 1, 2020 could claim 400 UNI. Those who provided liquidity to pools before that day could claim more;
2. Liquidity mining was applied across several major pools, meaning that users could farm UNI while providing liquidity;
3. The Uniswap Grant Program gave the tokens to developers ready to contribute to the project.

These ways are not as relevant for most users today, however. Liquidity mining was suspended, and new airdrops were not announced. Hence, there comes the question:

How can I get UNI now?

In an interview in May this year, Uniswap founder and CEO Hayden Adams stated that liquidity mining may be relaunched. But until we know any more details, the only way to get UNI tokens is buying them for other cryptocurrencies or for fiat. ChangeNOW allows for both options.

Buy UNI instantly without registration for 200+ crypto coins including Bitcoin, Ethereum, and Doge. The service is non-custodial, meaning you don’t have to store your coins at our platform to make exchanges. And we got rid of the hidden fees: all charges are already included in the estimated rate that you see. The only exception is a fee paid to the network of the coin that you sell.

How can I profit from Uniswap?

As we described in the Features part, all trades on Uniswap are executed through liquidity pools. For providing liquidity to these pools, users get rewarded: 0.3% from each trade is proportionally distributed among the providers.

You can become a liquidity provider to Uniswap, too. To cut it short, you have to choose a pool, set some tech details, and deposit your funds. Technically speaking, this can only take 5 minutes; more time may be spent doing research. See the official Uniswap guide on adding liquidity.

Here’s one thing to remember while choosing a pool: the more providers there are in a pool, the smaller will be your share of the reward; on the contrary, the more popular the asset is, the more often it is swapped and the more there are fees.

If you own NOW tokens and want to make the most of them, we welcome you to provide liquidity to the NOW pool on Uniswap.

Bottom line

Despite having many strong competitors, Uniswap remains the most popular decentralized exchange on Ethereum. The platform is in close contact with its community and reacts swiftly on changes in the DeFi segment — one of such examples is the recent Uniswap V3 update. Such a trend suggests that UNI tokens are also to continue the positive dynamic, especially if the team will further continue to decentralize (which could be itself a great example to any crypto project). If you are thinking of buying the UNI token, we welcome you to check the rates on ChangeNOW.

ChangeNOW doesn’t give investment advice and takes no responsibility for any trader’s decision or action. Cryptocurrency implies risk, and we urge you to do your own research before investing any sum.