Just Add a Token: How Uniswap Became the First DEX to Overtake Coinbase

DeFi fever has become a high point for decentralized exchanges as well. One of the first DEXs to use smart contracts was Uniswap, which introduced Automatic Market Maker (AMM) technology.

Until this summer, Uniswap could not boast of impressive trading volumes, but only during June this figure increased 10 times - from $ 1.75 to $ 17.5 million, and by the end of August it exceeded $ 425 million, overtaking the American Coinbase.

From Siemens to Ethereum

The idea behind Uniswap has a specific starting point - Vitalik Buterin's post on Reddit from October 2016.

At that time, according to him, the problem of all decentralized exchanges was too large a spread. Buterin proposed to solve it with the help of smart contracts that would manage the reserves of different tokens and balance their prices relative to each other depending on supply and demand.

This idea was implemented by Hayden Adams, a young computer engineer from New York. He got into the crypto industry after being fired from Siemens in the summer of 2017.

After his dismissal, he was contacted by his friend, Karl Floersh, who offered Adams to retrain as a programmer and start writing smart contracts on Ethereum. Adams agreed and proceeded to create an "automatic market maker" (he calls the idea behind Alan Liu from Gnosis, who described AMM in the same 2017).

Floersh introduced Adams to the Ethereum developer community and in the spring of 2018 introduced him to Vitalik Buterin (who invented the name "Uniswap" - at first Adams called his project "Unipeg").

Already in August 2018, Uniswap received its first funding - a grant from the Ethereum Foundation in the amount of $ 100 thousand. According to Adams, Uniswap is based on "Ethereum values."

The official launch took place in November 2018. Presenting the platform, Adams listed its main characteristics:

How does automatic market making work?

In Uniswap, the AMM principle is implemented using liquidity pools, which are trading pairs and consist of users' funds blocked in a smart contract. The ratio of tokens in a pair determines the price of a token. The realized supply and demand for tokens changes the volume of tokens in the pool, therefore, the ratio between them, that is, the price.

Any user can participate in the pool - he needs to add both tokens from a pair to the pool in the ratio at the current rate. Such users become “liquidity providers” who receive 0.3% of the amount of transactions with the pool's trading pair for their contribution. Thus, the commissions are earned by the users themselves, not the platform.

Possible price deviations from the spot market are smoothed out by arbitrage. Another feature of the platform is that anyone can add a trading pair with a new token.

Climbing the pedestal

Uniswap did not conduct an ICO. The project has attracted money from professional investors. Uniswap received more than $ 1 million in 2019 from the Paradigm fund, and in 2020 it has already raised $ 11 million.

The rejection of the ICO is one of the reasons why Uniswap did not have its own token from the very beginning.

For a long time, Uniswap was inferior to centralized exchanges, and in the DeFi space - to lending protocols like MakerDAO. That all changed when DeFi products began to flood the market, providing passive income for providing liquidity.

At the same time, profitable farming became popular . By this time, Uniswap was already the most authoritative project in the DEX segment.

In addition, the Uniswap developers prepared for the hype from the technical side - a major protocol update took place in May . It eliminated the weakest points - in particular, they introduced a direct exchange between ERC-20 tokens (before that all exchanges took place through ETH), instant swaps for trading and improved control over quotations.

From the beginning of July to the end of August, the volume of funds blocked in Uniswap pools increased almost 5 times - from $ 47 million (July 2) to $ 831 million (August 31).

However, the success of the SushiSwap fork, launched in late August, contributed to the record inflow of funds into the protocol . 

SushiSwap has offered record returns by distributing its own governance token to all members of its pools. Thanks to this proposal, the project pools, initially launched on Uniswap, received $ 1.4 billion in just a few days. It became obvious that it was precisely such an incentive as a token that was lacking for decentralized exchanges to accelerate.

At first, SushiSwap quickly poached the lion's share of funds from Uniswap users, but after the reduction in the distribution of tokens, SUSHI also rapidly lost them . They returned to Uniswap with the release of the UNI governance token, which was announced on September 16.

What has UNI changed?

Uniswap has learned the lessons of its fork.

Firstly, the emission of new tokens was turned into a large advertising campaign: 15% of all tokens were distributed for free to all users of the platform, including those who have not used Uniswap for a long time. The minimum amount of coins
was 400 UNI.

Such an impressive distribution immediately attracted the attention of a huge audience.

Secondly, the developers have changed the approach to inflation. In SushiSwap, for the first two weeks, the emission of SUSHI tokens was increased 10 times compared to the standard value. An oversupply of new coins has led to a drop in prices. In UNI, the inflation mechanism (2% annually) will be included only after four years.

Thirdly, Changed the approach to collective project management. The SushiSwap protocol provides for a developer fund, where 10% of all issued SUSHI coins go. Uniswap also has a fund - the so-called "community treasury". Over the next four years, 43% of all coins (430 million UNI) will go into it. The fund is intended to provide grants, encourage community initiatives, liquidity mining and other areas.

One month after the release of UNI, on October 18, the Uniswap community will take control of the fund. During this time, UNI holders must select a council of representatives from among the "protocol delegates". In six months, the community will take control of Uniswap's main lever - commission.

The creators of Uniswap urged the community to select from its ranks a “diverse and high quality roster of protocol delegates,” and to initiate discussions and communication about specific decisions to be made. And the community responded.

Thus, a "union" has already formed , attracting small UNI holders to its ranks. It aims to pool small steaks of coins in order to defend the interests of small users and have a voting share comparable to whales.

Will Uniswap Become More Decentralized?

The development team, which is entitled to 21.5% of UNI emissions), will continue to improve the protocol code and conduct audits. At the same time, team members will not be directly involved in governance, although "they can delegate their votes without intending to influence future decisions."

Another 18% of the coins were given to investors. 

The creators of Uniswap are striving to further decentralize the project by transferring the levers of exchange management to the community. But it's not that simple.

Investors, advisors and members of the Uniswap team are entitled to 40% of the total supply of tokens, which are to be distributed via vesting. This procedure involves blocking a given number of tokens in smart contracts and issuing small amounts from it according to a specific schedule.One way or another, thanks to the implementation of UNI, the amount of blocked funds (TVL) on Uniswap not only returned to its previous values, but even exceeded them - and at the time of writing is $ 1.92 billion.