The Uniswap Protocol
Uniswap is a DEX protocol built on the Ethereum blockchain. It allows users to swap various Ethereum-based tokens directly from their wallets without the need for a centralized intermediary like a traditional exchange. Uniswap is a prominent example of an Automated Market Maker (AMM), a type of decentralized exchange that uses smart contracts to facilitate trading by providing liquidity through pools of tokens.
There are currently three versions of the Uniswap protocol:
Uniswap V1
Launched in November 2018.
V1 had many different liquidity pools but all of the pools had to contain at least Ethereum. This meant that you could only swap ETH for a single ERC20 token, or vice versa. For example, you could swap ETH for USDC, or USDC for ETH.
However, you could not directly swap USDC for DAI. To do this, you would need to first swap USDC for ETH, and then swap the ETH for DAI. This is known as a two-step trade.
Uniswap V1 used a constant product formula, also known as the x*y=k formula, to determine the exchange rate between two tokens in a liquidity pool. This formula ensured that the product of the quantities of the two tokens remained constant, and it automatically adjusted the exchange rate as one token was bought or sold.
Uniswap V2
Launched in May 2020.
the main problem of V1: the absence of ERC20-ERC20 token pools. This forced users to swap one ERC20 token for another through ETH, incurring higher costs and slippage.
Uniswap V2 solved this problem by introducing ERC20-ERC20 liquidity pools. This allows users to trade directly between any two ERC20 tokens, without having to go through ETH. This significantly improves the efficiency and cost-effectiveness of trading on Uniswap.
In addition to ERC20-ERC20 liquidity pools, Uniswap V2 also introduced a number of other improvements over V1, including:
Flash swaps: These allow users to execute complex trades in a single transaction, without having to pay any upfront fees.
Decentralized price oracles: Uniswap V2 provides highly decentralized and manipulation-resistant on-chain price feeds. This is critical for many decentralized financial applications.
Overall, Uniswap V2 is a significant improvement over V1. It offers a more efficient, cost-effective, and versatile trading experience.
Uniswap V3
Launched in May 2021
Here are some of the key reasons why Uniswap launched version 3:
To improve capital efficiency for liquidity providers: Uniswap v3 introduces a new concept called concentrated liquidity, which allows liquidity providers to focus their liquidity within a specific price range. This can significantly improve capital efficiency, especially for assets with high price volatility.
To reduce slippage for traders: Uniswap v3 uses a new pricing algorithm that can help to reduce slippage for traders, especially when trading large volumes.
To increase decentralization: Uniswap v3 is more decentralized than previous versions, with a greater focus on community governance and control.
To add new features and functionality: Uniswap v3 introduces a number of new features and functionality, such as range orders, non-fungible liquidity (NFL), and support for multiple oracle feeds.
V3 introduced a number of new features, including more granular control over liquidity positions, fee tiers, and support for multiple token pairs per pool.
Discover the Latest Features in Uniswap V3 Uniswap V3, which made its debut on the Ethereum mainnet on May 5, 2021, introduces several significant updates that enhance its functionality:
Increased Decentralization
Concentrated Liquidity
Enhanced Security
New Fee Tiers
Oracle Feed Advancements
Range Orders
Non-Fungible Liquidity
Licensing
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