The UNI price update as of now is $8.72. In the previous 24 hours, its trading volume was $198,796,175, and its value has decreased by -4.46%. As of now, UNI's live market cap is $7,980,030,140, and it is ranked as the #23 on the Coincu. UNI has a circulating supply of 1,001,306,631 and a maximum supply of 1,001,306,631.

You may have heard of Uniswap, which has become a topic of controversy in the DeFi community. The Uniswap protocol was originally developed by Hayden Adams, inspired by Vitalik Buterin's post on the market maker equation X * Y = K. With a rational approach, Hayden created Uniswap as a protocol for automated liquidity provisioning. Now, let's delve into the details of Uniswap to understand its functionality and the associated risks!

What is Uniswap?

Uniswap is a decentralized exchange that operates on a completely different model. It is not owned or controlled by a single company. Instead, it utilizes an automatic liquidity protocol, which is a novel trading methodology.

Uniswap was established in 2018 on the Ethereum blockchain, the world's second-largest cryptocurrency project in terms of market capitalization. This makes Uniswap compatible with all ERC-20 tokens and infrastructure, including popular wallet services like MetaMask and MyEtherWallet.

Uniswap is also open source, allowing individuals to copy the code and build their own decentralized exchanges. It offers a unique feature of enabling users to list tokens on the market for free. In contrast, centralized exchanges are profit-driven and charge high fees for listing new coins. As a decentralized exchange (DEX), Uniswap grants users complete control over their funds at all times. This is in contrast to centralized exchanges, which require traders to surrender control of their private keys to log orders on an internal database, causing delays and higher costs.

How Uniswap works?

Uniswap operates through two smart contracts: "Exchange" and "Factory." These smart contracts are designed to perform specific tasks based on predefined conditions. The Factory smart contract is responsible for adding new tokens to the platform, while the Exchange contract handles all token swaps or trades. In the upgraded Uniswap v.2 platforms, any ERC20-based token can be exchanged for another.

Automated liquidity protocol

Uniswap tackles the liquidity problem faced by centralized exchanges through an automated liquidity protocol. This protocol incentivizes exchange traders to become liquidity providers (LPs). Users on Uniswap pool their funds to create a fund that facilitates all transactions on the platform. Each token listed on Uniswap has its own pool to which users can contribute. The values for each token are calculated using a mathematical algorithm operated by a computer.

This approach eliminates the need for buyers or sellers to wait for the opposing party to appear in order to complete a transaction. They can execute transactions quickly at a known price as long as there is sufficient liquidity in the pool to support it.

Each LP receives a token representing their contribution to the pool. For example, if you contributed $10,000 to a liquidity pool worth $100,000, you would receive a token representing 10% of the pool. This token can be redeemed for a share of the trading fees. Uniswap charges a fixed 0.3% fee to consumers for each trade executed on the platform, which is immediately transferred to a liquidity reserve.

When a liquidity provider decides to withdraw, they receive a portion of the total fees from the reserve based on their stake in that pool. The token they received, which tracks their share in the pool, is then destroyed.

In the Uniswap v.2 upgrade, a new protocol fee was introduced, which can be enabled or disabled through a community vote. This fee transfers 0.05% of each 0.3% trading fee to a Uniswap fund for future development. Currently, this fee option is disabled, but if activated, LPs will start receiving 0.25% of pool trading fees.

How Does Uniswap's Automated Liquidity Provisioning Work?

The "X" and "Y" in the "X * Y = K" equation represent the number of available ETH and ERC20 tokens respectively. The constant "K" can be set by the creators of the Uniswap exchange contract. Although "K" may seem random, it is of utmost importance. The multiplication of "X" and "Y" must always equal "K".

The graph below illustrates the function of "K", which is a constant. Token B (ETH) is represented on the Y-axis, while token A (ERC20) is represented on the X-axis. The first red dot (old position) signifies the current price for swapping the ETH-ERC20 pair based on the existing balance of ETH tokens and ERC20 tokens.

As the liquidity pool contains more ERC20 tokens and fewer ETH tokens, the balance of ETH tokens decreases while the balance of ERC20 tokens increases. This means that the red dot will move to a new location. In other words, it's a simple pricing algorithm where the price rate progresses along the graph.