What is Uni? In-Depth Look at the Leading DEX Platform Today

In the world of decentralized finance (DeFi), it’s hard not to have heard of Uniswap. Since its launch in 2018, this platform has grown into one of the largest decentralized exchanges (DEX) globally. But what exactly is uni and why is it so important? This article will help you better understand its operating mechanism, development versions, and how to use Uniswap to trade cryptocurrencies.

What Is Uniswap?

Uniswap is a cryptocurrency trading platform operating on the Ethereum blockchain, allowing users to exchange ERC-20 tokens without intermediaries or centralized authorities. Unlike traditional exchanges, Uniswap does not use an (order book) to connect buyers and sellers. Instead, it employs an (Automated Market Maker) (AMM) technology to facilitate trading.

The emergence of Uniswap marked a major milestone in the DeFi sector, providing users with a new way to trade without registration, identity verification, or complex procedures.

The AMM Mechanism - The Heart of Uniswap

The (AMM) is the technical foundation for Uniswap’s operation. Instead of relying on buyers and sellers, AMM uses liquidity pools to automatically price and execute trades.

The working principle of AMM is based on a pre-programmed mathematical formula. This formula calculates the price of each token in the liquidity pool based on supply and demand. When you perform a trade, the price is automatically calculated by smart contracts, ensuring that the price always reflects the current supply-demand ratio.

Advantages of AMM over traditional order books include not requiring the presence of buyers or sellers. As long as there is liquidity in the pool, transactions can be executed 24/7 without interruption.

Liquidity Pools and Liquidity Providers

Liquidity pools are collections of assets pooled from the community of users. Each pool contains two types of tokens—for example, ETH and USDC—stored in a smart contract. This pool provides sufficient liquidity for transactions to be carried out at any time.

To ensure the pool has enough assets, Uniswap needs individuals willing to deposit their tokens. These individuals are called liquidity providers (Liquidity Provider - LP). When a liquidity provider deposits tokens into the pool, they earn a fee from each transaction that occurs within that pool.

Specifically, Uniswap charges approximately 0.3% fee per swap. This fee does not go directly into Uniswap’s pocket but is shared among liquidity providers proportional to their contribution to the pool. This incentivizes users to participate in the DeFi ecosystem and earn passive income.

Constant Product Formula

To maintain stability and sufficient liquidity, Uniswap uses a mathematical formula called the “constant product formula” (công thức tích không đổi). This formula works as follows:

When you withdraw a certain token from the pool, the amount of that token increases proportionally to keep the product constant. This automatically adjusts token prices based on supply and demand, preventing price manipulation or excessive imbalance.

This formula ensures that liquidity pools never run out completely, because when the liquidity of a token decreases, its price increases, discouraging traders from buying or selling it excessively.

Development History: From v1 to v3

Uniswap v1 (2018)

The first version was launched in 2018 to demonstrate that the AMM model could work in practice. Uniswap v1 allowed trading between ERC-20 tokens, but was quite basic compared to subsequent versions. Nevertheless, v1 opened a new path for DeFi.

Uniswap v2 (2020)

The upgrade in 2020 brought significant improvements. v2 enabled direct trading between ERC-20 token pairs without needing to go through Ethereum (ETH) as an intermediary. Additionally, v2 reduced gas fees considerably, increased trading efficiency, and added features like flash swaps, allowing developers to borrow tokens with the condition of repayment within the same block.

These enhancements helped Uniswap become one of the most widely used DEXs.

Uniswap v3 (Current)

Version v3 marks a major evolutionary step. One of its key features is “concentrated liquidity”—allowing liquidity providers to select specific price ranges to provide liquidity instead of dispersing across the entire range.

For example, instead of depositing tokens into a pool spanning from 0 to infinity, a provider can choose to deposit within a range from $1,000 to $5,000. This approach significantly improves capital efficiency, as most trades occur within a narrow price range.

UNI Token - Uniswap Governance

Although Uniswap has been operating since 2018, it wasn’t until 2020 that it launched its own native token—UNI. UNI is an ERC-20 governance token that enables holders to participate in decision-making regarding Uniswap’s development.

Current UNI Data:

• Current price: $5.39
• 24h change: -7.65%
• 24h trading volume: $3.14M
• Circulating market cap: $3.42B

Each UNI holder’s voting power is proportional to their token holdings. This governance system is fully decentralized; anyone holding UNI can propose and vote on protocol changes.

How to Trade on Uniswap

Trading on Uniswap is quite simple compared to centralized exchanges. Just have a cryptocurrency wallet containing ERC-20 tokens, and you can start:

1. Visit the official Uniswap website and connect your Ethereum wallet (MetaMask, WalletConnect, etc.)
2. From the token list, select the token you want to sell and the token you want to buy
3. Enter the amount of tokens to sell. The system will automatically display an estimated amount of tokens you will receive
4. Check gas fees and transaction fees (0.3%), then click “Swap”
5. Confirm the transaction on your wallet. The trade will execute immediately

The entire process occurs on the blockchain, giving you full control over your assets.

Risks and Disadvantages

Although Uniswap offers many advantages, there are also risks to consider:

High Gas Fees: Operating on Ethereum, during network congestion, gas fees can become very high. This makes small transactions less cost-effective.

Smart Contract Risks: Like any dApp, Uniswap depends on smart contract code. Although contracts are audited, there remains a theoretical security risk.

Impermanent Loss: When providing liquidity, the prices of the two tokens can change differently. This can cause “impermanent loss”—your assets’ value may be less than if you simply held the tokens without depositing into the pool.

Slippage: For large trades or low liquidity pools, the price you receive may differ from the expected price.

Uniswap’s Impact on DeFi

Uniswap has become a pillar of DeFi, transforming DEX from a theoretical concept into a daily reality for millions of users. It provides the infrastructure upon which other DeFi projects are built.

Through continuous upgrades, Uniswap keeps improving performance, security, and user experience. This capability allows users to earn passive income by providing liquidity, creating a sustainable cycle for the ecosystem.

Uniswap is proof that decentralization is not just a concept but a viable and efficient business model in today’s cryptocurrency world.