Whether because of the recent bust, or because of the overall boom that they have seen over the past decade, cryptocurrencies have been in the news for a while now. And many are predicting that their importance and acceptance, and the possibility of a decentralized system of finance that comes with crypto, will only increase with time. Because of such positive predictions for the crypto ecosystem, many have tried to cash in on the future and introduce their own currency in the market (currently there are more than 5000 in total).
With so many different cryptocurrencies going around in the market, it is imperative that a system of exchange between different currencies also exists. Because this system belongs to the overall realm of decentralized finance, it needed to be both automated and run collectively. One answer to this question of a decentralized system of exchange for cryptocurrencies was Uniswap.
What is Uniswap?
Uniswap is an Automated Market Maker (AMM) that utilizes liquidity pools to provide liquidity for the exchange, and uses mathematical formulas to determine the value of a currency being exchanged. For uniswap, this formula is a simple constant value equation:
x * y = k
The basic concept of Uniswap has been the same since its inception: a decentralized exchange for cryptocurrencies working as an automated market maker, but it has also evolved over time into three different versions which are fundamentally the same but also significantly different from each other. Understanding the older versions is crucial to understanding its latest V3 and considering its prospects for the future.
Version One of Uniswap was launched on the Ethereum mainnet on November 2, 2018. Before this, EtherDelta was pretty much the only DEX existing in the market. EtherDelta was a record book-based exchange, while Uniswap is an AMM as explained above.
Version 1 of Uniswap only supported ETH – ERC20 exchange. An exchange between DAI and
USDC would need to pass through an ETH exchange. As shown in the figure, DAI was first exchanged with ETH and then ETH was exchanged with USDC. The exchange was ultimately completed, but there was a slight problem with this double exchange: cost.
Every exchange conducted on the platform had a 0.30% trading fee. A double exchange, as shown above, costs twice as much as a single exchange. This was a problem for the exchanging party, but did serve the purpose of rewarding the LPs for providing liquidity to the system.
This double exchange problem was solved in version 2 for all ERC20 tokens at least.
ERC20 tokens could now be directly exchanged on the Uniswap platform that was launched in May of 2020. Compared to version 1, version two was considerably more user-friendly and less costly due to its ERC20-ERC20 pools. But it also introduced some other features into the mix as well:-
- Time Weighted Average Price or the average price over a period of blocks is calculated by using the values of the price achieved through oracles. These oracles were a new induction in version two of the software.
- Another groundbreaking feature that version 2 introduced was Flash Swaps. These Flash Swaps allowed users to withdraw as much as they wanted of any ERC20 token on Uniswap at no upfront cost and do whatever they wished with them (execute arbitrary code), provided that by the end of the transaction execution, they either: pay for all ERC20 tokens withdrawn, pay for a percentage of ERC20 tokens and return the rest, or return all ERC20 tokens withdrawn.
A small percentage of the exchange fee (0.05% out of the total 0.30%) was now dedicated to the future development of the Uniswap platform because even though the platform had seen huge initial success, competitors such as SushiSwap drained a significant portion of Uniswap’s liquidity and further improvement and innovation were necessary for market survival.
Uniswap’s version 3 was announced for May 05, 2021. This was big news for the crypto world because of the features and possibilities that Uniswap was introducing in this version. It is important to discuss all of these features to be able to fully understand what version 3 meant for the development of decentralized exchanges and crypto as a whole:
- Concentrated liquidity was the flagship feature that version 3 wanted to introduce. Most of the other features that came with version 3 were just a byproduct or prerequisite of this feature. Concentrated liquidity basically means that Liquidity Providers will not provide liquidity to the liquidity pools for all price ranges, but will do so in a specific price range that they themselves determine at the time of providing. Due to the feature of concentrated liquidity, a range of other features were also introduced in version three.
- Higher capital efficiency for version 3 liquidity providers.
- Active Liquidity
- Range orders
- Non-fungible liquidity
- Flexible fees
- Advances Oracles
All of these features seem complicated at first glance, and judging by their names, would be difficult to understand by average crypto traders and investors. But if we talk about it in very simplistic terms, uniswap’s version 3 is enabling a higher return on capital for its users, and it’s also creating possibilities for developers to build an entire ecosystem around it.
Uniswap V1 was basically the introduction of Automated Market Makers into the world of DeFi and Decentralized exchanges. It was a very basic model and had significant slippage costs and other inefficiencies such as only providing liquidity for ETH – ERC20 pools. V2 changed that bit about Uniswap and introduced ERC20 – ERC20 pools to the equation. V3, however, introduced a plethora of new features that increased the overall efficiency, user experience, and capital returns of the platform.
We here at Antlia are also working towards making a decentralized future for finance where our own DEX StakeFlow will introduce many features to add to the usability and profitability of decentralized exchanges. The possibilities for decentralized finance in the future are immense, and it is tools like Uniswap and StakeFlow that will make those possibilities a reality.