Centralized exchanges have served as one of the most common points for accessing crypto assets. The primary trait of centralized exchanges focuses on governance by a central authority. Users have to trust the centralized exchanges with custody of their funds. However, many centralized exchanges have filed for bankruptcy or lost their funds in cyber thefts and hacks. The growing interest in Uniswap tokenomics provides evidence for the demand for decentralized exchanges.
Decentralized exchanges such as Uniswap were developed to address the problems of centralization, alongside improving accessibility and security. Uniswap DEX is one of the leading decentralized exchanges with billions of dollars registered in trading volume. Over the course of six months leading up to October 2022, the average monthly trading volume of Uniswap reached $34 billion.
The doubts emerging from questions like “Is Uniswap a token or coin?” can create confusion for beginners. Therefore, you need to understand the role of UNI in the Uniswap ecosystem. The following post offers a detailed overview of the tokenomics of Uniswap DEX alongside an in-depth description of Uniswap fundamentals.
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Fundamentals of Uniswap
The first thing you need to understand about the tokenomics of Uniswap is a definition of the platform. It is a decentralized crypto exchange that allows users to keep custody of their assets. One of the most prominent highlights in the Uniswap tokenomics explained for beginners would refer to the platform’s radical growth. Following the launch of Uniswap in November 2018, it has developed a massive user base worldwide. As of October 2022, the decentralized exchange had facilitated more than 113 million transactions, accounting for more than $1.2 trillion in terms of trading volume.
Working of Uniswap
Uniswap has served as one of the best examples of implementing DeFi in action. You can develop a better understanding of UNI tokenomics by learning how Uniswap works. Uniswap relies on the Automated Market Maker or AMM mechanism rather than order books for facilitating transactions. Automated Market Maker is a smart contract that helps users in trading or swapping tokens through liquidity pools. The foremost advantage of AMMs is the flexibility for permissionless access to crypto asset trading and swapping facilities.
Liquidity pools contain a token pair, including the token you want to exchange and the token you need. Users can deposit tokens in the liquidity pools and receive Liquidity Provider tokens or LP tokens. The LP tokens are different from the native Uniswap token, i.e., UNI. How? Liquidity provider tokens represent the share of a liquidity pool in a specific pool. LP tokens can help liquidity providers in reclaiming their deposits and earn rewards from transaction fees generated in the liquidity pool.
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Importance of Liquidity Provider Tokens
The working of LP tokens is a crucial element in the functioning of Uniswap DEX. You can use LP tokens in the form of collateral for borrowing other crypto assets from decentralized lending protocols. Some users can maximize their rewards by using borrowed crypto to provide more liquidity in one pool and obtain more LP tokens. Subsequently, the users repeat the same process to earn more rewards.
Rather than emphasizing questions such as “Is Uniswap a token or coin?” you can review the largest Uniswap liquidity pools. You can find two different pools featuring the same assets, i.e., DAI and USDC, with two different trading volumes. How? The two pools feature different trading fees, with one charging 0.01% and the other 0.05%.
Interestingly, the pool with 0.01% trading fees had a total value of almost $782.7 million, while the one with 0.05% had around $469.8 million. On top of it, the two high-value liquidity pools also rely on the nature of the assets. Both USDC and DAI are stablecoins, thereby implying lesser volatility and limited risk of impermanent loss. Therefore, the pool serves as one of the top choices for liquidity providers.
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Origins and Roadmap of Uniswap
Another common concern regarding Uniswap points to the potential future of the decentralized exchange. Interestingly, the answers to “Does UNI coin have a future?” can be perceived from the origins of the platform. Hayden Adams, a software engineer from Oregon, created Uniswap. He conceptualized the foundations of Uniswap in 2018 and launched the first version, Uniswap V1, in November 2019.
Within no time, the decentralized exchange grabbed the attention of DeFi enthusiasts and Ethereum users. Subsequently, the team released Uniswap V2 in May 2020 and Uniswap V3 a year later in May 2021. Hayden Adams serves as the lead for the development of Uniswap with a continuously expanding team of engineers and contributors across different sectors.
The transition of Uniswap from V1 to V3 provides a clear impression of how Uniswap tokenomics could evolve in future. On top of it, key highlights of Uniswap V2 and Uniswap V3 can provide an explanation of the future prospects for Uniswap. Uniswap V2 introduced the basic liquidity pool model along with the value advantage of innovative pricing with constant product formula. The constant product formula helped to ensure fair and accurate pricing of assets on the platform.
The most recent development in the Uniswap roadmap, i.e., Uniswap V3, introduced many notable improvements alongside new functionalities. In addition, Uniswap V3 features a new pricing model known as concentrated liquidity. The new pricing model offers better control to liquidity providers for choosing the price ranges of price allocation. As a result, it changes the basics of Uniswap tokenomics explained in Uniswap V2. The concentrated liquidity pricing model helps in activating additional fee tiers, which can offer liquidity providers more opportunities for earning higher rewards according to the risks.
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Important Features of Uniswap
The features of Uniswap are also an important component for understanding whether Uniswap would have a favorable future. How has the Uniswap token become one of the most valuable assets in the crypto landscape? You can find your answers in the different features of Uniswap, which have encouraged its adoption. First of all, Uniswap features a user-friendly interface where users can connect their wallets compatible with ERC-20 tokens.
You can start using the platform instantly without any KYC verification and AML compliance. One of the significant highlights of Uniswap refers to the primary functionality of token swapping. The decentralized exchange features more than 50 liquidity pools with different tokens alongside tokens that you would not find on centralized exchanges. On top of it, Uniswap features a flexible fee structure, which attracts the attention of users. Before clearing doubts such as “Is Uniswap a token or coin?” you should take a look at the following features.
- Uniswap helps users in crypto trading without entrusting a centralized platform with custody of their assets.
- The unique liquidity pool model helps anyone contribute to the liquidity pool, thereby guaranteeing higher liquidity alongside lower transaction fees.
- The UNI tokenomics enable a powerful decentralized governance model, which allows UNI token holders to vote on governance decisions regarding the platform.
- Another significant highlight in the features of Uniswap refers to multi-chain compatibility. Users could access the value benefits of Uniswap across different blockchains, including Ethereum, Optimism, Polygon and Arbitrum.
- The integration of Uniswap with the DeFi ecosystem helps users in accessing different DeFi services and applications directly through Uniswap.
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Uncovering the Fundamentals of Uniswap Tokenomics
The first highlight in a review of the basics of tokenomics in the Uniswap DEX refers to the UNI token. UNI is the native token of Uniswap DEX and serves a prominent role in governance of the platform. UNI token holders can vote on proposals for improving or updating the Uniswap protocol.
The review of Uniswap tokenomics should also point to the fact that UNI tokens can help in adding liquidity to the DEX or serve as payments for transaction fees. With a total supply of 1 billion UNI tokens, the Uniswap protocol has released around 753 million of them. The token inflation rate is almost 27.6% for the existing rate of issuing tokens, which would decrease as the supply increases in future.
Another important highlight in answers to “Does UNI coin have a future?” refers to the TVL of Uniswap. With a TVL of $5 billion, Uniswap is one of the biggest DeFi protocols based on Ethereum. Another fundamental aspect of UNI tokenomics refers to the platform and network fees. Each trading or swapping transaction on Uniswap requires platform fees alongside gas fees for Ethereum.
Interestingly, the Uniswap V3 upgrade enables the facility of creating liquidity pools with three unique fee rates. Furthermore, governance proposals can also help in introducing additional fee rates. The basic functionality of UNI token can provide answers to “Is Uniswap a token or coin?” as it differs from the LP tokens. The fundamentals of tokenomics of Uniswap also showcase how Uniswap makes money through transaction fees. Also referred to as the ‘taker fee’ on the total value of the trade, it helps in rewarding the liquidity providers for their contributions to the pool.
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Distribution of UNI Token
The guide to tokenomics of Uniswap should also emphasize the distribution of UNI tokens. Uniswap airdropped the token to every user who had traded on Uniswap before September 2020. The team had created around 1 billion UNI tokens at the genesis, with a portion reserved for users that would unlock over the period of 4 years. Any outline of Uniswap tokenomics explained for beginners would include the details of the token distribution on Uniswap. Here is an outline of the allocation of UNI tokens.
- 60% have been allocated to the Uniswap community members.
- 15% of the community tokens allocated from the UNI token supply was claimed in the airdrop by liquidity providers and users.
- 21.266% have been allocated for team members and future employees, which would unlock over the course of next four years.
- 18.044% of the total UNI tokens have been entrusted to investors, with a 4-year unlocking schedule.
- 0.69% of the UNI token supply has been allocated to advisors with a 4-year vesting period.
In addition, the Uniswap tokenomics also feature an annual perpetual inflation rate of 2% after four years. The perpetual inflation rate can help encourage continuous participation of UNI token holders in governance of Uniswap protocol.
One of the most important highlights in the tokenomics of Uniswap refers to the UNI airdrop. Uniswap selected almost 12,000 addresses that had initiated a transaction on the platform for an airdrop of 400 UNI tokens. In addition, around 15% of the tokens allocated to the community were airdropped to users and liquidity providers.
It is also important to note that around 43% of the community tokens were reserved in the government treasury. The treasury plays an important role in managing the supply of UNI Uniswap token by distributing UNI tokens through liquidity mining, community initiatives and other applications. Around 430 million UNI tokens are reserved in the community treasury.
What is the Purpose of UNI?
The answers to “Does UNI coin have a future?” in discussions about tokenomics of Uniswap point towards utility of UNI tokens. It does not matter whether you call UNI a token or a coin as long as you understand its purpose. UNI token serves as a governance token, which serves an important role in empowering the community.
With the help of the community treasury, Uniswap can establish a decentralized governance mechanism with collective ownership of the treasury. Most important of all, Uniswap has achieved success in developing a strong and active governance community. The Uniswap governance forum helps users participate in voting for proposals by delegating their UNI tokens or submitting proposals.
Conclusion
The overview of Uniswap tokenomics explained the basics of Uniswap DEX and how it serves as a prominent entry into the DeFi ecosystem. Uniswap features an exclusive Automated Market Maker model, which has served as a benchmark for many other similar solutions. You can find two different types of tokens in the Uniswap DEX, including the LP tokens and UNI tokens.
LP tokens or liquidity provider tokens represent the share of liquidity providers in specific liquidity pools. On the other hand, UNI token is the native governance token of Uniswap DEX. UNI token has a significant role in driving Uniswap towards growth through introduction of decentralized governance and community ownership.
*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!
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