What is Uniswap?

Uniswap (UNI), a decentralized cryptocurrency exchange, is peak decentralized finance. Its logo is a unicorn, it trades a billion dollars a day, it’s horribly expensive to use, and in one kind, unsolicited surprise late last year, it gave everyone who’d ever used it cryptocurrency that was soon worth about $3,000. Here’s a handy explainer to what Uniswap is all about, what its token does, and how to buy it.

What is the Uniswap protocol?

The central issue of cryptocurrencies is trust. Crypto advocates think that it makes little sense to entrust anyone else with your money, since they believe that it is unwise to let the government or large financial institutions meddle with your affairs.

The whole point of Bitcoin, then, is that it is a trustless payment mechanism, designed in such a way that you can be sure that you own your Bitcoin, any given transaction is verifiable. And since it’s run by a decentralized, anonymous network of miners, it’s censorship-resistant. Also: Bitcoin’s supply is constant, impervious to the whims of any one central bank. This makes it suitable for anyone who wants to be in complete control of their money.

How counterproductive, then, that almost all cryptocurrency trading takes place on centralized cryptocurrency exchanges, such as Binance and Coinbase. To trade on these exchanges, which are run by companies and operated by people, you have to give up your rights to your cryptocurrencies. They’re called ‘custodial’ exchanges, because these exchanges control your cryptocurrencies. Exchanges can collapse or get hacked, and since you’ve relinquished your rights to your crypto to the exchange, you can’t get your money back. Even worse, crypto exchanges are often uninsured and barely regulated. (Quadriga CX, Einstein Exchange, and Mt Gox are among examples of exchanges that have lost their customers’ money, either through negligence, poor security or criminal activity).

In response to the risks posed by custodial exchanges, the crypto community has invented decentralized, non-custodial exchanges. These exchanges don’t require you to relinquish access to your cryptocurrencies and are run, in part and increasingly so, by their communities. Uniswap is the market leader. It was launched in November 2018 by founder Hayden Adams.

Uniswap is a so-called “automated market maker.“ Instead of an exchange composed of an orderbook on which traders buy and sell crypto (which is how most crypto exchanges operate), Uniswap lets you swap cryptocurrencies that are stored in ”liquidity pools”—pairings of cryptocurrencies.

Uniswap’s algorithm automatically swaps tokens through these pools to get the best price. For instance, if you wanted to swap ETH for AAVE, Uniswap would reroute your token from ETH -> WBTC -> USDT -> AAVE. While, in theory, this should be cheap, Uniswap relies on Ethereum, a blockchain that is now so outdated and bottlenecked that trading $0.01 worth of ETH can cost about $15. Still, it makes sense for bigger trades, and is undoubtedly an impressive system.

However, although the exchange is non-custodial, meaning that it never takes away control over your cryptocurrencies (meaning its team can’t pilfer them) and does not request any personally identifying information about its users (like a passport photo or driver’s license), Uniswap creator Hayden Adams and a small team of coders were, essentially, still running the show and dictating the future of the platform.

That changed slightly in the autumn of 2020, when Uniswap launched its eponymous token, offically known as Uniswap but better known as UNI.

What is UNI, Uniswap’s token?

UNI is a so-called “governance token,” meaning that those holding the tokens can use them to vote on proposals to upgrade the network. Part marketing drive, part loyalty reward, the Uniswap team decided to airdrop 15% of all UNI tokens to a little more than 50,000 addresses. That amounted to about $2,800 shortly after launch when its price peaked to $7 on September 19. Its price then dipped, but in January 2021 hit highs of $15. That meant that anyone who had received those 400 UNI tokens would have $6,200 in their pockets. For free!

Uniswap’s team took 21.51% of the tokens, investors another 17.8% and a further 0.69% to advisors. Those people must lock up their tokens for four years before they can use them, and Uniswap’s protocol will then inflate the price of the token by 2% each year. But the rest of the token will go to Uniswap’s “governance treasury,” a community-run chest distributed according to the wishes of those holding UNI.

Its community can do whatever they want. However, it’s very expensive to even suggest a vote (you need 1% of the total UNI supply to even submit a proposal, and most of the community needs to be on your side to pass the proposal. Just one proposal has passed. It involves setting up an administrative structure to hand out grants to help develop the network). But even though it’s unwieldy and expensive to use, it’s a true experiment in decentralized governance. It’s exciting.

Equally as exciting is the prospect of trading UNI. Taken literally, trading UNI is like trading rights to control the vote of the Senate. In practice, it’s like trading a token that represents the value of the entire protocol. It’s one of a growing plethora of governance tokens that grew out of the summer of 2020’s DeFi (decentralized finance) boom. Others include AAVE, COMP and YFI. As of January 2021, Uniswap is one of the most successful. It has a market cap of $4 billion and $3.8 billion of the token is traded on cryptocurrency exchanges each day, according to metrics site CoinMarketCap. That makes it the 13th largest token by market capitalization.

How is UNI different than Bitcoin?

UNI differs from Bitcoin in a few key ways.

First, Bitcoin is a “coin” and UNI is a “token.” That is because Bitcoin powers the Bitcoin blockchain, and it is mined by a decentralized network of computers that solve complicated maths puzzles to verify transactions. By contrast, UNI is a token that runs on the Ethereum blockchain. On Ethereum, ETH is the only coin that can be mined. And miners mine ETH to process UNI trananctions. It is what is known as an ERC-20 token, the name applied to the generic token standard for the Ethereum blockchain.

Being an ERC-20 token has perks. Blockchains aren’t great at speaking to each other—you can’t get an Ethereum contract to work with a Bitcoin smart contract without some complicated engineering. However, it’s very easy for ERC-20 tokens to speak to one another, which means that UNI can be used in most other decentralized finance applications. You can take out loans of UNI on decentralized finance lending market AAVE for instance, or lend it out and earn interest of 0.03% a year. But you can’t do that with Bitcoin: To do that, you’d have to convert your Bitcoin into something like “Wrapped Bitcoin”—a synthetic representation of Bitcoin that is based on the Ethereum blockchain. And that’s… complicated!

Second, Bitcoin is far larger than Uniswap, and far older, too. While Bitcoin, the largest cryptocurrency by market capitalization, has a market cap of $615 billion, UNI has a market cap of $4 billion. Put another way, while Bitcoin accounts for 62% of the global crypto market cap, UNI accounts for 0.4%. And while UNI was created in September 2020, and its purpose—governance—is very much in its infancy, Bitcoin has been around for over a decade.

Third, UNI’s value is secured by very different things than Bitcoin. Bitcoin is secured by its miners, who, as mentioned, solve complex equations to verify transactions. The UNI token is backed by Ethereum miners, who do much the same. But Uniswap’s protocol—the decentralized exchange bit—is entirely the Uniswap team’s own making. Its protocol is audited, but the types of bugs and vulnerabilities it could be exposed to are very different than those faced by the Bitcoin or Ethereum blockchain.

Vulnerabilities in DeFi protocols are exploited all the time, resulting in hundreds of millions of dollars worth of losses. Hackers have exploited vulnerabilities in other DeFi protocols to mint an infinite amount of new tokens or drain pools of investors cryptocurrencies, for instance. The point is not that UNI is necessarily at risk, but has different kinds of risks that users should be aware of.

How to buy UNI

Since UNI is an ERC-20 token, it’s very easy to buy. You can buy and sell it on decentralized exchanges, such as Uniswap itself. You can also trade it on centralized exchanges, such as Binance, Coinbase Pro and Kraken, and you can buy it from crypto brokerages, such as Wealthsimple and Coinbase. Although the prices may be similar, fees are very different. Trades on Uniswap, no matter how small, can cost upward of $15 due to Ethereum’s high transaction fees. These fees are unlikely to decrease anytime soon. Fees elsewhere are often much cheaper. That said, fees on regular cryptocurrency exchanges such as Binance and Coinbase Pro tend to be the cheapest; on Wealthsimple and Coinbase, you pay a little extra for the convenience and ease offered by those platforms.