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What is Uniswap?
Uniswap was launched in 2018 by American engineer Hayden Adams. Its function is simple: to enable the exchange of digital assets in a decentralized way without the intervention of a third party, in other words not like with a traditional stock exchange.
On Nasdaq, it is the eponymous company that ensures the proper execution of exchanges. On Uniswap, it is the technology itself that takes care of it 💡.
Uniswap's major innovation is its so-called Automated Market Maker (AMM) model. Instead of using traditional order books, Uniswap allows users to provide liquidity to trading pools themselves by adding funds to smart contracts, which automatically execute a trade when a predefined condition is met.
These liquidity pools consist of asset pairs, for example, ether (ETH) and another token ERC-20 (the token of a project developed on Ethereum). In exchange for their contribution, the liquidity providers receive the fees paid by the traders.
What is the market share of Uniswap?
Uniswap has seen rapid adoption and exponential growth since its launch 🚀.
Its MA model has been praised for its simplicity and accessibility, allowing anyone to become a liquidity provider and participate in decentralized exchanges.
Of all the DEX available on Ethereum, its market share reaches 88%, ahead of Curve (11%) and Sushiswap (1%).
Part of what makes Uniswap so successful is its relatively low fees compared to the competition: most other projects charge additional commissions to feed a community treasury 💰.
Over the past seven days, its trading volume has approached $10 billion, according to Dune Analytics (all blockchain protocols combined this time).
It is not uncommon for its market share to exceed that of Coinbase (the world's second largest centralized exchange platform) on some pairs.
If we take the total weekly trading volumes, Uniswap sometimes matches (which is considerable) with the biggest ones.
"Centralized platforms are easier to use, cheaper and often offer more liquidity, but not all tokens are listed at Binance, Coinbase or their competitors," points out Stanislas Barthélémi, crypto expert at KPMG.
"The great advantage of Uniswap is that anyone can create a liquidity pool to enable the exchange of a token," he insists.
The other great strength of the application is its "non-custodial" aspect, which means that no one has control over your funds, unlike centralized players to whom you hand over the management of your cryptos. "Many centralized intermediaries have been heavily heckled or even disappeared in 2022 (FTX, ed.). By using Uniswap, you protect yourself from an unexpected closure," insists Stanislas Barthélémi.
Since Uniswap requires that you manage your own wallet, the protocol is reserved for a smaller audience than the centralized players. "Despite its easy-to-use interface, the biggest users of Uniswap are not private individuals," explains Mounir Benchemled, co-founder of the DEX aggregator Paraswap. "They are mostly centralized Exchanges or aggregators like us," he insists.
How has Uniswap evolved since 2018?
In May 2020, Uniswap launched its "version 2", introducing new features such as the ability to trade ERC-20 tokens directly with each other, without the need for ETH as an intermediary.
In 2021, Uniswap launched "version 3," bringing additional enhancements to capital efficiency and liquidity pool customization.
"This update was very important, because before this one, liquidity could be used on all possible prices of a token and this strongly limited the efficiency of the capital," notes Stanislas Barthélémi. "Now we can set a price range in advance, which makes the model much more efficient," he points out.
The case of version 3 shows how innovative Uniswap is. A few days after the expiration of the license which forbade (for 2 years) anyone to exploit the version 3 code, several competitors (Sushiswap and PancakeSwap) immediately took it over and adapted it to their solutions.
"On the DEX side, Uniswap is certainly the undisputed leader in innovation and communication", says Mounir Benchemled.
All is not well, however, as liquidity providers regularly face capital losses when they wish to withdraw their funds from the liquidity pools (this is called "Impermanent Loss").
A problem pointed out by Cyrille Pastour, co-founder of the Swaap protocol, which offers a system to eliminate this drawback:
"Numerous studies have shown that depositing liquidity on Uniswap passively on uncorrelated asset pairs implies negative returns on average, with very high variability. Put differently, depositing liquidity on Uniswap is more like a gamble than an investment strategy. This is due to the mathematical models used by Uniswap as well as the lack of use of oracles that cause the dreaded Impermanent Loss phenomenon."
What is the business model of Uniswap?
Unlike many decentralized finance protocols... there are almost none 😅.
When you use Uniswap to exchange tokens, the transaction fees you pay are passed on in full to the liquidity providers.
👉 There is no remuneration to feed the reserve of the DAO (decentralized autonomous organization) at the head of Uniswap, unlike what is practiced on decentralized lending apps like Aave or Compound.
In the short term, the low cost of using Uniswap is a real advantage, but it also has the disadvantage that in the long term, it limits its revenues and thus its means of development.
"Uniswap has impressive volumes, but has never made a single cent," notes Marc Zeller, a decentralized finance specialist and head of Aave Chan Initiative, a delegation platform within the governance of the Aave decentralized lending protocol. "But it's essential to make money, because the revenue earned by a DAO helps fund the protocol and also the service providers," he notes.
There is no perfect solution: if Uniswap decides one day to allocate part of the fees to its reserve, this will reduce the share reserved for liquidity providers. The latter will then be encouraged to go elsewhere and the protocol will mechanically lose market share.
What is the purpose of the UNI token?
The UNI token is the utility token of the Uniswap protocol. It was launched in September 2020 as part of a community distribution (airdrop).
Everyone who had used Uniswap at least once in the past was eligible. The airdrop amounted to 400 UNI, which at that time was about 1300 euros. Today, it would be about 2000 euros.
This token offers a right of governance. Its holders can propose improvements of Uniswap, vote on the proposals of the others, and globally participate in the decision making concerning the evolutions of the protocol. Each UNI token holder has one vote to express his preferences.
Eventually, one billion UNI tokens will be in circulation. Here is the vesting schedule, i.e. the release of the tokens:
How is its governance exercised?
Uniswap distinguishes itself from many other protocols with its "on-chain" governance. Each vote involves a transaction on the blockchain and, when a decision is made, it is automatically implemented in the code.
This system is rare enough to be highlighted, because for many protocols it is necessary for the leaders to apply the results of the votes "by hand".
Who controls Uniswap?
This is the big problem of the project: its governance is concentrated in a few hands, notably American venture capital funds, including Andreessen Horowitz (a16z) and Paradigm. Note that, without their endorsement, nothing moves! 👀
With the fear of harsh US regulation on cryptos, these players are pushed to a wait-and-see attitude and many strategic decisions cannot be implemented.
"Many would like to add a transaction fee to remunerate the protocol, but no proposal is able to pass," says Marc Zeller. "Uniswap is clearly under American influence and the members of its governance are more like shareholders of publicly traded companies," he insists.
According to the U.S. courts, a decentralized autonomous organization (DAO) is legally akin to an association. Etched in the marble of law, this premise would have profound implications for its members 😅.
"If a governance vote resulted in Uniswap being recharacterized as an issuer of illegal financial securities (as could potentially be the case if fees were charged to fund a reserve), the voters could be exposed to U.S. sanctions," says Mounir Benchemled.
Hence the reluctance of funds to move on governance votes; this situation concerns many other crypto projects.
"This situation shows that Uniswap is still far from being a truly decentralized DAO. Even though the UNI token has been distributed, there are few proposals for improvements and it can be considered one of the least active DAOs in the ecosystem," Marc Zeller emphasizes.
Who are the big challengers of Uniswap?
In the absence of economic fundamentals, with sustainable revenues, Uniswap will have to move. And in the meantime, other projects, whose governance is less subject to U.S. regulatory fears, will be able to continue to innovate and try to take market share.
"In terms of traction and innovation, Curve is a serious contender since the arrival of its version 2, which allows the exchange of tokens other than stablecoins," notes Mounir Benchemled. In March, Curve recorded daily volumes of $10 billion over a few days.
"It's a much more complex protocol than Uniswap, but it allows you to do a lot of extra things," he insists.
Balancer or Maverick are also challengers.
"Uniswap's monopoly should erode over time and that's a good thing," Mounir Benchemled argues. "For the moment they are crushing volumes because they were the first to enter the DEX sector, but if tomorrow a player has a superior value proposition users will have no trouble migrating," he stresses. "In any case, having a single dominant player is not healthy."