9 Important Things to Know Before You Buy Uniswap (UNI)
What is Uniswap?
Uniswap is a DeFi protocol used to automate transactions between cryptocurrency tokens on the Ethereum blockchain network through smart contracts.
Uniswap (UNI) is one of the most talked-about cryptocurrencies of 2021. If you’ve been watching the charts, then you’ve probably caught this crypto quickly climbing. Although, it’s not yet among the top 10 cryptocurrencies as of the time of writing.
Key Takeaways
• Gas fees depend on the congestion at the time of a transaction, not the amount of the transaction. This makes Uniswap a poor choice if you’re only trading a small amount.
• Uniswap cryptocurrency is a governance token, meaning holders can vote on proposed changes to the Uniswap Exchange. Its success is tied to the exchange because if the Exchange gets more popular, it will likely lead to more people wanting to buy the token.
It currently sits just outside the top 10, with a market cap of over $11 billion. Perhaps you’re thinking about buying Uniswap because of its results so far and because people are so excited about it.
Below are the 7 things you need to know before buying Uniswap.
1. Uniswap is Both a Cryptocurrency and a Decentralized Exchange
Learning about Uniswap starts with the Uniswap Exchange, a decentralized cryptocurrency exchange that offers peer-to-peer trading.
With a centralized Exchange, such as Changelly, Paxful, and Coinbase, the Exchange monitors and facilitates transactions. You will also need to register for an account.
A decentralized exchange is different because there’s no third party involved and no registration required. You just connect a crypto wallet to Uniswap’s app, and you can trade cryptocurrencies.
Decentralizedfinance (DeFi) applications have grown quite a bit this year. And Uniswap ranks among the biggest decentralized Exchanges by trading volume.
What about the Uniswap cryptocurrency? It is a governance token, meaning holders can vote on proposed changes to the Uniswap exchange. Its success is tied to the Exchange because if the Exchange gets more popular, it will likely lead to more people wanting to buy the token.
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2. The Exchange operates as an Automated Market Maker
The Uniswap Exchange is an automated market maker. This is a type of decentralized exchange that offers various pairs of tokens to trade. Prices are set using mathematical formulas, and trades occur using smart contracts.
For this to work, the Exchange has liquidity pools. Each liquidity pool has funds for a pair of cryptos. It draws from liquidity pools when users make trades.
Let’s say you want to trade your Ethereum (ETH) for Dai (DAI). You’d go to the swap page on Uniswap and connect a crypto wallet. Next, you’d enter the amount of Ethereum you want to trade and select Dai as the cryptocurrency you want to receive.
Uniswap would immediately calculate the amount of Dai it will pay you for your Ethereum. If you confirm the trade, Uniswap will pay you Dai out of its Ethereum/Dai pool. There would also be a transaction fee, called a gas fee, which is always paid in Ethereum.
But where do the funds in those pools come from? That’s where Uniswap’s users come in.
3. Users Can Lend their Crypto to Uniswap
To have enough funds in its liquidity pools, Uniswap rewards users who lend their crypto. You can choose the “Add liquidity” option to lend crypto to any of Uniswap’s pools.
When adding liquidity, you need to contribute equivalent amounts of both cryptocurrencies to the pool. For example, if you choose the Ethereum/Dai pool, you’d need to lend Ethereum and Dai.
In return for your contribution, Uniswap will pay you a share of the gas fees for that liquidity pool. Continuing the example above, every time someone traded Ethereum and Dai, you’d get a share of the gas fees.
4. It Runs on the Ethereum Blockchain
Uniswap was built on Ethereum’s blockchaintechnology. That’s why users on Uniswap need to pay gas fees with Ethereum.
The issue is that Ethereum is congested due to its popularity. There are more transactions than Ethereum’s blockchain can handle which drives up fees and slows down processing times.
In addition, gas fees depend on the congestion at the time of a transaction, not the amount of the transaction. This makes Uniswap a poor choice if you’re only trading a small amount. It doesn’t make sense to pay $30 in fees for a $50 trade.
Ethereum has been going through a series of upgrades toward its next version, Ethereum2.0. The upgrades should drastically decrease processing times and gas fees. But the process likely won’t be completed until 2022. Until then, Ethereum’s issues will affect Uniswap.
5. It has Inspired a Range of Competitors
Uniswap is far from the only game in town. There are quite a few decentralized exchanges that operate similarly. Here are a few examples: Pancake, SushiSwap, BurgerSwap, Curve, and DODO.
One advantage several other exchanges offer is that they run on the Binance Smart Chain, which currently has much lower fees than Ethereum. PancakeSwap, in particular, has had success as a less expensive alternative to Uniswap.
6. You can buy the Uniswap Token or Trade for It
If you want to invest in Uniswap, there are a couple of ways you can do it. The first is to buy it through an Exchange like any other cryptocurrency. Several topcryptocurrency exchanges list Uniswap. Here are a few popular options: Coinbase, Gemini, and Binance.
You can also trade for it on the Uniswap Exchange. To do that, you would need to buy another cryptocurrency first and transfer it to a crypto wallet. On the Uniswap app, you would connect your wallet, and then make your trade.
7. It’s a High-Risk Investment with Room to Grow
Make sure you understand the risks involved before buying Uniswap. Cryptocurrencies are volatile, and there’s the possibility that your investment ends up worthless in the future. One of the biggest potential problems is that regulators may try to crack down on DeFi as a whole, which could negatively affect Uniswap.
Even taking the risk into account, there are reasons to like Uniswap as an investment. It has taken a commanding lead over the competition, as it has 63.8% of the market share among decentralized exchanges at the time of this writing. And that’s with Ethereum’s issues. If Ethereum 2.0 is a success, Uniswap could capture even more users who were previously turned off by high fees.
For those who think DeFi is the future, Uniswap makes sense as cryptocurrency investment. If you do buy any, remember that you can also lend it to a liquidity pool to earn rewards.
8. It Has a Market Capitalization With Growth Potential
With a market capitalization of around US$10.1 billion, Uniswap is the 11th most valuable digital asset. Currently, there are 587 million UNI coins are in circulation and the maximum supply of UNI coins is capped at 1 billion.
Following broader crypto trends, the UNI price rose sharply at the beginning of this year and touched a record high of US$43.93 on May 5, 2021. Since then prices have declined by more than 50%. Currently, it is trading around US$17.43.
9. Uniswap has a Connection to the Ethereum Network
Uniswap was created by Hayden Adams. Its initial version was published to the Ethereum mainnet on November 2, 2018.
The protocol was launched on the last day of the Devcon 4 conference and it quickly gained a lot of traction, resulting in initial seed investment to fund work on the second version. Uniswap V2 was launched in May 2020, and in September the new crypto token called UNI was launched.
Frequently Asked Questions (FAQ)
1. Are Uniswap Fees Paid?
Swapping fees are immediately deposited into liquidity reserves. This increases the value of liquidity tokens, functioning as a payout to all liquidity providers proportional to their share of the pool. Fees are collected by burning liquidity tokens to remove a proportional share of the underlying reserves.
2. Does Uniswap take a Fee?
Uniswap is a protocol on Ethereum for swapping ERC20 tokens. Unlike most exchanges, which are designed to take fees, Uniswap is designed to function as a public good, a tool for the community to trade tokens without platform fees or middlemen.
3. How is Uniswap Price Calculated?
The primary rule is the constant product formula. When a token is withdrawn (bought), a proportional amount must be deposited (sold) to maintain the constant. The ratio of tokens in the pool, in combination with the constant product formula, ultimately determines the price that a swap executes.
Final Thoughts
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