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What is Uniswap - A Beginner's Guide (2022 Updated) - YouTube
Channel: 99Bitcoins
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What is Uniswap?
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How is it different from
traditional cryptocurrency exchanges?
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And what is this UNI token thatâs
been rocketing up the price chart?
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Well stick around,
here on Crypto Whiteboard Tuesday,
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weâll answer these questions
and more.
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Hi, Iâm Nate Martin
from 99Bitcoins.com
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and welcome to Crypto
Whiteboard Tuesday
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where we take complex
cryptocurrency topics,
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break them down
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and translate them
into plain English.
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Before we begin,
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don't forget to subscribe
to the channel
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and click the bell so youâll
immediately get notified
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when a new video comes out.
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Todayâs topic is Uniswap
and the UNI token.
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Itâs important to note
that this is an advanced topic
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that relies on prior knowledge
of how cryptocurrencies work.
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If youâre new to crypto
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you may want to check out
additional videos
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that weâll mention and link to
in the description
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to get you up to speed.
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Now letâs get started.
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Uniswap is a decentralized,
permissionless exchange
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that allows anyone to trade
Ethereum ERC-20 tokens directly
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without the use of a middleman.
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OK...what exactly did I just say?
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Donât worry: weâre going to
work through this together.
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To understand
what makes Uniswap different,
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letâs start out by taking a look at how
a traditional cryptocurrency exchange,
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like Kraken or Bitstamp works.
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To begin with,
traditional exchanges are centralized,
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meaning they are owned
by a company
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that has complete control
over the exchange
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and the computers that run it.
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Traditional exchanges
are also regulated by KYC laws,
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which is an abbreviation for
âKnow Your Customerâ.
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These laws require
each new customer
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to provide extensive
personal information,
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including your home address
and tax ID numbers
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before you can begin trading
on the exchange.
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Additionally, in order to trade
on a traditional exchange,
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users need to deposit money
on the exchange,
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basically giving the exchange
control over their funds.
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On a traditional exchange,
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when users want to buy or sell
a certain cryptocurrency
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they submit a âBuyâ or âSellâ order.
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All of these orders are recorded
in the exchangeâs order book.
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Once thereâs a match
between a buyer and a seller,
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a trade is conducted.
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So this is how a traditional,
centralized exchange works.
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If you want to learn more
about exchanges and trading,
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you can check out our
âWhat is Bitcoin tradingâ video
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which weâll link to below.
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Now letâs talk about
decentralized exchanges,
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also known as DEXs.
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DEXs are part of the decentralized
finance ecosystem.
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Decentralized finance,
or DeFi for short,
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is a term given to traditional
financial services
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such as exchanges,
lending services, and insurance,
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that have been decentralized
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through the use
of Blockchain technology.
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If youâre not familiar with DeFi
or Blockchain technology
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you can also check out
these two videos.
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Weâll leave the links
in the description
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Now, unlike a traditional exchange
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that requires a controlling company
and centralized servers to operate,
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A DEX consists of a set of smart
contracts deployed on a blockchain.
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In simple terms,
itâs a set of automated rules
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that are executed by a network
of independent computers
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without any central entity controlling it.
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And if you want to learn more
about smart contracts
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and how they work,
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you can take a look at our
âWhat is Ethereumâ video.
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Since DEXs arenât controlled
by anyone,
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they canât be regulated
and are in fact open to everyone.
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When using a DEX
thereâs no need to open an account,
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or go through an identification process
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where youâd have to supply
your personal information.
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Additionally DEXs allow users
to trade directly
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from their own wallets
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allowing them to keep full control
over their funds.
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A key difference a DEX has
from a traditional exchange
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is in the way transactions
are conducted
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and how price is determined.
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As Iâve mentioned earlier,
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in a traditional exchange
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buyers and sellers set
their price expectations
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as âBuyâ and âSellâ orders
inside the order book.
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The more buyers and sellers
an exchange has,
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the larger its order book
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and the more âliquidâ
the exchange is said to be.
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In other words,
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itâs easier to find a buyer and a seller
that agree on a price
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and make a trade.
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Imagine there are only 2 buyers
and 2 sellers on a certain exchange.
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It would be very hard for any trade
to get executed,
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since it's unlikely to find two people
who would agree on a price.
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Without liquidity
the exchange is practically dead
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since no trades can be conducted.
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Itâs the same as having a shopping mall
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with very few stores
or and customers.
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Thereâs not a lot of business
that will be done there.
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In fact, liquidity is such
an important criteria
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to determine the quality
of an exchange,
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that some exchanges use
external services called âmarket makersâ
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that are willing to buy and sell
at all times,
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creating constant liquidity
for the exchange.
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DEXs, on the other hand,
donât store any user funds
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and have no order book.
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Liquidity on DEXs is created
through liquidity pools.
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Liquidity pools are
a shared pot of funds
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deposited by the general public,
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and DEXs use liquidity pools
in order to fulfill âbuyâ and âsellâ orders.
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People who deposit funds
in liquidity pools
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are known as liquidity providers
or LPs.
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In exchange for the locked funds,
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LPs receive a part
of the DEXâs trading fees
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in a process known as
liquidity mining.
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Now that weâve covered
the differences
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in how liquidity is provided between
traditional and decentralized exchanges,
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letâs talk about how the price
of a certain coin is determined.
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On a traditional exchange,
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when a seller and buyer reach
an agreement
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through matching orders
in the exchange order book,
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a trade is conducted.
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At that point the price of the coin
is determined
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until another trade is executed
at a different price.
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In other words,
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the price of the most recent trade
is considered the current price
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on the exchange.
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A decentralized exchange
on the other hand,
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doesnât have an order book.
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Users donât trade with one another,
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they trade within a liquidity pool.
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And instead of using the last trade
to determine the price,
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a mathematical formula is used.
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This formula, or algorithm,
is called an Automated Market Maker
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or AMM for short.
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Uniswap uses an AMM called
âConstant Product Market Maker Modelâ
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to determine the price of coins
on its exchange.
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This AMM follows a simple formula
of X times Y equals K.
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This means that when trading,
for example, Ether for DAI
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the amount of Ether available
times the amount of DAI available
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on Uniswapâs Ether/DAI liquidity pool
should always equal a constant number.
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Letâs break this down a bit further.
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Imagine there are 10 ETH
and 10,000 DAI on a certain liquidity pool.
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As we can see,
using the AMM model
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this means that the number of ETH
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times the number of DAI equals 100,000,
this is our constant K.
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If I were to buy 1 ETH,
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this will reduce the number of ETH
in the pool to 9.
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Now the question remains,
how many DAI will this cost.
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Well, the way to calculate this
is to take our constant of 100,000
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and divide it
by the new number of ETH, 9.
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This would give us the new number
of DAI required in our pool - 11,111.
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Meaning we need to deposit
around 1,111 DAI to buy one ETH.
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As you can see the price is determined
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by how much of a certain token
you want to buy,
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and not by how much someone else
wants to get for it.
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By using the âConstant Product
Market Maker Modelâ algorithm,
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liquidity is kept without the need
for external market makers,
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no matter how large the order size
or how tiny the liquidity pool.
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This model makes it infinitely expensive
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to consume the whole amount
of a certain coin,
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putting a damper on larger orders.
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For example,
In our previous exercise,
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if I wanted to buy 9 ETH
it would cost me 90,000 DAI
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to maintain the 100,000 constant,
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making each ETH cost 10,000 DAI
instead of the 1,111 DAI it would cost
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to buy only 1 ETH.
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Of course there are other DEXs
with different AMM algorithms
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than the one used on Uniswap,
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but that conversation goes beyond
the scope of this video.
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Now that weâve covered DEXs
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we can focus on Uniswap more in depth.
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Uniswap is a DEX built on top of
the Ethereum network infrastructure.
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Itâs a set of automated rules
used for trading ERC-20 tokens,
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which is a term given to a certain
standard of Ethereum tokens.
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Uniswap is the most popular
decentralized application, or DAPP,
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on the Ethereum platform
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with hundreds of thousands of users
trading on it each week.
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Additionally Uniswap is one of
the most forked projects
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in the DeFi space,
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meaning people use its code
to build additional applications.
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The first version of Uniswap
started out in November of 2018.
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Uniswapâs V1 allowed trading
of any ERC-20 token to Ether and back.
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In May of 2020 V2 was released
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and the trading of ERC-20 tokens
directly between one another
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without first having to trade with Ether
became available.
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In May of 2021 V3 was released
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allowing a more effective use of capital
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to whoever decides to supply
liquidity to Uniswap.
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In other words
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you can squeeze more âjuiceâ
out of the money you deposit
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in the liquidity pool.
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Trading also got more efficient,
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lowering trading costs compared to V2.
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Additional changes which we wonât
go into in this video
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include concentrated liquidity,
active liquidity, range orders,
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flexible fees and more.
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So how do you actually use Uniswap?
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Well, itâs fairly simple,
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all you need is an Ethereum wallet
like Metamask
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which can interact
with other Ethereum applications.
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Once you have Metamask
installed on your browser,
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head over to Uniswap.org,
click on âConnect Walletâ,
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choose âMetamaskâ
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and now you can start trading
any Ethereum ERC-20 token
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that is listed.
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Keep in mind that since there are
many people conducting trades
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on Uniswap simultaneously,
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the price shown
when you place your order
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may be different from the actual price
when the order is executed.
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This phenomenon is called âSlippageâ
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and you are able to cap
how much slippage
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you are willing to tolerate
before cancelling your order.
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The reason for slippage is that
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every trade on Uniswap
is actually an Ethereum transaction
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and it can take some time
to broadcast the transaction
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and get it confirmed
by the Ethereum network.
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By the time the transaction
is confirmed,
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the price may have already changed.
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Due to its decentralized
and non-regulated nature,
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Uniswap supports many types
of ERC-20 tokens.
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In fact, practically anyone
can create their own token
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and list it on Uniswap for free,
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filling Uniswap with a wide variety
of tokens
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but unfortunately a fair number
of scam coins as well.
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Just because a coin is listed
on Uniswap
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doesnât mean itâs legit
or has any intrinsic value.
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As opposed to a traditional exchange
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that does extensive due diligence
and research on every coin
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it adds to its platform ,
Uniswap doesnât.
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So - itâs up to you to Do Your
Own Research as they say
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and decide if you want to invest
in a certain coin.
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Finally, letâs talk about the UNI token.
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A coin that has gradually made its way
to the list of top cryptocurrencies.
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In September of 2020
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Uniswap introduced the UNI token
through an airdrop.
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Meaning, each person
who previously used Uniswap
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received 400 UNI tokens for free.
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Even though the UNI token
has risen substantially in value
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since its release,
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it wasnât designed to serve
as a currency.
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Itâs actually a governance token,
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allowing whoever holds it to influence
and vote on development decisions.
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The more tokens you hold,
the more voting power you have.
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The idea is for the Uniswap team
to gradually fade out their involvement
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in Uniswap
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and leave the management
of the project to the token holders.
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So how is it that a token
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that wasnât meant to have any value
rose to the top of the cryptocurrency list?
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WellâŠit seems that the price of UNI
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represents how valuable people believe
that Uniswap will be in the future,
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and therefore are willing to pay
to be a part of its governing body.
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In the cryptocurrency space
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itâs not uncommon for coins
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that never had any intention
of being used as a financial asset
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to become very valuable.
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In the end itâs up to you to decide
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if being a part of the Uniswap
governing body
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is worth the price of the UNI token.
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Thatâs it for todayâs episode
of Crypto Whiteboard Tuesday.
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Hopefully by now you understand
what Uniswap is -
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a decentralized exchange
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that allows users to trade
any ERC-20 token
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without any intermediary.
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You may still have some questions.
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If so, just leave them
in the comment section.
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Finally, if youâre watching this video
on YouTube,
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and enjoy what youâve seen,
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donât forget to hit the like button,
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subscribe to the channel
[761]
and click that bell
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so that youâll be notified
as soon as we post new episodes.
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It really helps us out a lot.
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Thanks for joining me
here at the Whiteboard.
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For 99bitcoins.com,
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Iâm Nate Martin,
and Iâll see youâŠin a bit.
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