Before the appearance of Uniswap, DEX was basically the liquidity provided by the operator, or in the case of the board format, only the Maker issued by the user had liquidity. As soon as the amount of exchange increases, it will be executed at a disadvantageous price, and in addition to the fee, you will have to pay the Ethereum fee, and minor tokens are almost illiquid in the first place.
Uniswap developer and background
This image was taken when Uniswap was released in November 2018. It’s a very simple look, and even if you just look at it, you can’t tell how great it is, but now it’s an indispensable service that symbolizes DeFi.
It was developed by an individual named Hayden Adams, who was neither a startup nor a venture capital firm. He was fired from his first job in 2017, Siemens, and after consulting with his friends, he was invited to start developing on Ethereum.
Uniswap differs from the existing DEX in the “Pool” part at the top right of the image. Like ETH / USDC and ETH / BAT, anyone can provide the liquidity of a pair of ETH / ERC20 tokens, and if there is no token pair, it was possible to add a new one.
Furthermore, Uniswap’s specifications are immutable, even the creator cannot change the rules and the assets cannot be retrieved. It works like a “free tool” that no one refuses.
Uniswap, which was initially personally developed, has since been funded by Paradigm and Coinbase to increase the number of teams, and in May 2020, the greatly evolved V2 was launched.
Uniswap’s modified DEX style
As mentioned at the beginning, the environment surrounding DEX changed drastically before and after the appearance of Uniswap. So why was DEX before Uniswap inconvenient? The above figure is a simple comparison of the differences between DEX services before Uniswap and Uniswap.
Before the appearance of Uniswap, DEX was mainly Kyber Network and 0x series, and if it was a swap type without a plate, slippage (exchange that has a large effect on the total amount of liquidity (It will be exchanged at a disadvantageous price) became high, and in the case of board trading, there were few people arranging boards in the first place. Furthermore, the number of tokens handled is quite limited, or the board is very thin or inconvenient. Anyway, although it can be used, the actual target tokens and users are very limited.
The situation at that time was that “since you can exchange funds directly from the wallet without depositing funds on the exchange, there is no inconvenience or fee.” The same is true for ordinary exchanges, and the type and liquidity of tokens handled are very important factors, but Uniswap solved these two problems at once on DEX.
Furthermore, as it is a feature of DeFi services, it is easy to incorporate it into other services, so a virtuous cycle has occurred in which it is incorporated into many DeFi services and supply and demand increase further. For example, even if the service is based on a specific token, it is possible to accept it with a general-purpose token such as ETH or stable coin on the surface, and exchange it with Uniswap on the back side for processing.
Motivation and revenue structure for Uniswap participation
So why do users deposit their assets in such a place? The reason is as follows (however, there is a possibility that liquidity provision may cause loss due to price fluctuations).
All transaction fees of 0.3% will be distributed to liquidity providers for Pool
Anyone can easily list ERC20 tokens on Uniswap
Since liquidity providers generate bond tokens, they can be used to provide incentives from outside.
Uniswap specifications cannot be changed and only the depositor can take out the assets
I can only say that there is an incentive to express the above in one word. The originator of Liquidity Mining, which is now quite popular, is also the commission income from Uniswap’s liquidity provision. And as a result of the improved liquidity of Uniswap, the convenience of token exchange via Uniswap has also improved. Then, the number of users increased and the fee income increased, which created a virtuous cycle of calling liquidity providers again. Furthermore, DEX such as Uniswap can be easily incorporated into other services. On the surface, the number of scenes that are used in the background without the user’s awareness has increased.
With this increase in usage and liquidity, Uniswap has become an indispensable service on Ethereum. Since then, Uniswap has evolved further with the release of a new version of V2, solving problems and adding new features.
Introducing Uniswap variants and further improving convenience
As mentioned above, Ethereum DEX has made great progress with Uniswap, but Uniswap V1 can only handle ETH / ERC20 combinations. Of course, it is possible to exchange ERC20s via multiple Pools, but the exchange fee and transaction fee will be higher.
Therefore, Curve has emerged as a variant that supplements the parts that Uniswap cannot cover. Curve handles the function of “exchange tokens of almost the same value”, and unlike Uniswap, the tokens handled are also those specified on the Curve side, and a very low fee is set. As a specific use, exchange between stable coins is the main, and recently, exchange between ERC20 BTC has also started
The reason for this demand is that even stable coins have different characteristics depending on the type, the price slightly fluctuates from $ 1 and the platforms that can be used differ. Moreover, there are rarely trade pairs between stable coins on exchanges.
DeFi is evolving rapidly, but Uniswap is definitely one of the core services. And AMMs like Uniswap continue to grow rapidly with more and more derivative services, attracting liquidity and users with incentives.
The tokens handled by DEX are really wide, and there are various tokens such as suspicious fraudulent tokens, real estate tokens that can be transferred only between KYC users, options trading tokens, etc. It’s a bit confusing, but since tokens are also used to express status and rights, DEX is important even if it is different from normal sales transactions.
Against this background, the exchange mechanism, which allows anyone to freely list tokens to provide liquidity and is non-stop and difficult to interfere with politics, has more functions than it looks on the surface.
However, with regard to volume, which is one indicator, the latest figures are, to say the least, a bubble driven by Liquidity Mining, and it is doubtful that this will continue to grow steadily in the future. In addition, since the buying and selling of suspicious fraudulent tokens cannot be stopped, it is undeniable that these problems may become more serious and some measures may be taken.
In order to solve such problems to some extent, services that can provide high UI and UX while filtering are required. Competition is progressing there as well, and it may take some time, but I think it will improve in the future.