What is Uniswap?
Uniswap is a decentralized crypto token exchange protocol. In other words, it is a crypto exchange in which users can trade crypto tokens, without trusting each other or a trusted third party . It operates acconding to smart contracts utilizing the blockchain, performing pre-programmed actions automatically.
Unlike traditional centralized exchanges, Uniswap is not based on so-called order book. Instead, the exchange between tokens is based on liquidity pools, where the ratio of two crypto tokens remains constant at all times. Tokens can therefore be exchanged in pairs, and there is no need to convert them into dollars in between, like in stock trading.
In addition to exchanging tokens, users can offer their own tokens to the liquidity pool. Users offering tokens to liquidity pools are called liquidity providers (LP). LPs thus fulfill the role of market maker of traditional stock exchanges, providing the necessary liquidity for trading. As a reward for providing liquidity, LPs receive a share of the exchange fee paid for trades in that pool.
Uniswap is so far one of the most illustrative examples of what kind of decentralized applications (dApps) can be implemented with blockchain technology. It offers a decentralized exchange that operates completely independently without a centralized intermediary, and whose operations are completely transparent, predictable and auditable by anyone. Although at the moment the objects of trading are all tokens of different crypto protocols, and thus the protocol does not yet have much use outside of crypto trading, it is a significant proof-of-concept in the feasibility of decentralized trading. In the future, with a protocol like Uniswap, any tokenized asset, such as stocks or bonds, could be subject to decentralized trading without a centralized intermediary.
Competitors of Uniswap
Uniswap is currently clearly the largest DEX protocol in the world. At the time of writing, its TVL (total valued locked) is more than double compared to the next largest Curve, and makes up about 30% of the total TVL of decentralized exchanges. However, DeFi is one of the most interesting sectors of the crypto industry, and Uniswap faces ever-increasing competition in the form of new challengers.
In our view, the success of Uniswap is largely connected to the success of the Ethereum ecosystem that serves as its foundation. If Ethereum maintains its position as the clear leader of smart contract protocols, Uniswap also has a good chance of remaining clearly the largest decentralized exchange. If, for example, Solana is able to seriously challenge Etehreum for the position of the world's largest smart contract protocol, it is possible that a decentralized exchange built on top of Solana (e.g. Jupiter) could also be a serious challenger to Uniswap for the first place in that category.
What is a UNI token?
The Uniswap protocol token is called UNI. UNI is by nature a so-called governance token, i.e. its primary purpose is to provide the opportunity to participate in decisions regarding the management and development of the Uniswap protocol.
For a long time, there was no real earning logic associated with owning a UNI token, but at the time of writing (March 2024), this is possibly just about to change. If the governance proposal just submitted by the Uniswap Foundation is approved by the token owners' vote, token owners who have staked or delegated their UNI tokens will get a share of the trading fees collected by the Uniswap protocol. This change makes the UNI token a cash flow generating token, whose future cash flows can be modelled.
UNI token potential
Uniswap was one of the hottest crypto projects in the 2020-2021 bull market. However, after the end of the bull market, the 2021UNI token started to weaken consistently against the rest of the crypto market, which is reflected by the decrease in its market value share (see figure)
However, at the time of writing (March 2024), there are early signs that the weakening of the UNI token may have come to an end. The above-mentioned governance proposal regarding the distribution of trading fees will significantly increase the financial incentives for owning a token. The importance of these incentives would increase especially if the general upward trend of the crypto market continues, DeFi activity increases and the latest v4 version helps Uniswap to remain competitive compared to other decentralized trading protocols.
If, for example, Uniswap's price reaches its previous peak level in 2021, that would mean a tripling of the rate as of the time of writing. On the other hand, if the total value of the crypto market in this market cycle were to be, as some analysts expect, 2-3 times the previous top of approximately three billion dollars in 2021, and Uniswap was able to reach its previous share of the total value, the multiplier of current price could be significantly higher.
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