Uniswap is the decentralized cryptocurrency exchange’s governance token. To comprehend how it works and whether the token is worthwhile purchasing, we must first grasp the concept of decentralized exchanges or DEXs.
- What it is: UNI is the native cryptocurrency of Uniswap, an Ethereum-based decentralized exchange. It is a governance token, which means that owners have a say in how the platform is run.
- History: Uniswap was founded by Hayden Adams, a former Siemens engineer.
The exchange began trading in 2018 and Uniswap is scheduled to issue its coin in September 2020.
- Market Cap: $11.3 billion in market capitalization (CoinMarketCap, July 2021).
- Availability: Almost all major bitcoin exchanges in the United States.
The Mechanism via which Decentralized Exchanges Operate
Cryptocurrency exchanges are classified into two types: centralized and decentralized. If you’re new to cryptocurrency investing, chances are you’re more familiar with centralized exchanges like Coinbase or Gemini.
Centralized exchanges function as a middleman, facilitating the buying and selling of goods and services. Most include know-your-customer (KYC) requirements, which require users to verify their identities through the submission of personal information.
Numerous exchanges offer custodial cryptocurrency wallets, which allow investors to leave their crypto assets on the exchange. And they frequently have a finite supply of coins ready for trade.
Uniswap and other decentralized exchanges operate without an intermediary. Traders can easily exchange tokens. DEXs facilitate trades through the use of smart contracts and do not rely on custodial wallets. And, rather than using typical order books with a buyer and a seller, the majority of DEXs make use of liquidity pools.
Liquidity pools are collections of tradable currency pairings. For instance, an investor may combine Ethereum (ETH) and Uniswap in a Uniswap liquidity pool.
They would subsequently be compensated with a share of trading fees whenever users exchanged ETH for UNI or UNI for ETH. Users of Uniswap can earn UNI by participating in the platform’s liquidity pool.
One approach to earn from buying UNI is to hold it in the long term with the expectation of a price gain. However, if you’re considering purchasing it, it’s vital to understand how interest is earned.
Recognize your competitive Environment
With any investment, you must determine how it compares to the competition. Uniswap is a top DEX, but it’s also worth considering the following:
- SushiSwap (SUSHI)
- SwapPancakes (CAKE)
The platforms are comparable (since the code is open-source, several of them are based on the same code). The primary points of differentiation are trading costs, the number of tradeable tokens, and user count.
Two points to consider with regard to all DEXs are regulation and gas fees:
Gas charges are distinct from trade charges: While the trading fees on the majority of DEXs are negligible, the gas fees — the ETH required to complete the transaction on Ethereum’s network — can quickly accumulate.
For example, at the time of writing, I would have had to pay over $10 in Ethereum gas fees to trade $70 of ETH to UNI on Uniswap. PancakeSwap is based on Binance’s Smart Chain, which is less crowded and has reduced gas prices.
Authorities may take action against DEXs: Regulation is a big topic right now, as authorities seek ways to rein in the burgeoning cryptocurrency business. One area of concern is preventing money laundering via anonymous trading, which might have a significant impact on DEXs.
Uniswap is based in the United States, and at the moment, only residents of the United States can trade on the platform. That is a significant advantage over other DEXs that are not permitted in the United States. Additionally, it recently released a version 3 upgrade that includes a feature called concentrated liquidity.
This enables investors to define their own range of liquidity prices (so you might opt to only provide UNI-ETH liquidity when ETH is worth more). It also gives it a competitive edge in the marketplace, as the code is initially exclusive to Uniswap for two years.
Should you purchase it?
As indicated previously, Uniswap (UNI) has a lot going for it. There are also suggestions that it may develop a collaboration with Robinhood, though the specifics are unknown.
As is the case with many other cryptocurrencies, the price of UNI has fallen precipitously since reaching an all-time high of $44.97 on May 3. Despite this, it is up more than 270 percent year to date. According to CoinMarketCap data, it is currently trading at $19.25.
All cryptocurrencies have a high level of risk. Not only are they volatile, which means they may experience significant losses as well as dramatic profits, but this is such a young business that we have no idea how it will develop.
As an investor, you should consider if Uniswap has the potential to perform well over the long run – and whether you are okay with the risks associated. Additionally, consider whether you believe it can outperform other investing possibilities.