Decentralization has been one of the focus areas of the blockchain technology. When people talk about blockchain, they often quote decentralization along with transparency, security, and immutability. However, the introduction of cryptocurrency exchanges has heavily compromised on decentralization. Efforts have been underway to ensure that the purity of decentralization is not compromised for any manifestation of the blockchain or cryptocurrency.
The primary challenge in achieving decentralization when it comes to cryptocurrency exchanges is in terms of liquidity. To address this issue, a lot of Ethereum-based liquidity protocols have been introduced. One such decentralized finance (DeFi) liquidity protocol is Uniswap.
Uniswap is a completely automated open-source DeFi protocol that was created in 2018 by Hayden Adams. It facilitated the swapping and provision of liquidity on the Ethereum blockchain. Just like any other Ethereum-based DeFi innovation, the smart contract is the epicenter of Uniswap. It is the versatility and robustness of these smart contracts that facilitate the swapping of Ethereum tokens in complete anonymity without necessitating any central authority.
The Uniswap protocol has its own native token called the UNI. The token provides the holder with governance privileges. There are about 1 million tokens minted in genesis out of which 60% of the tokens are supplied to the community and 40% are made available to investors and members.
The relevance of Uniswap in liquidity
To understand the importance and relevance of Uniswap in maintaining liquidity in a decentralized ecosystem, we need to understand what liquidity is in the context of a decentralized exchange. Liquidity is the measure of the number of transactions that happen on the cryptocurrency exchange. As you may have known, liquidity is one of the most important factors that investors consider before investing in a crypto exchange.
In a centralized exchange, the volume of trade as it is is higher than its decentralized counterparts. Therefore, it is easy to showcase liquidity. In addition, there is also a possibility to emulate trading within the exchange by using artificial accounts or in the worst case, borrow the liquidity of other crypto exchanges by using an API.
Since there is no possibility to connect an existing exchange or use artificial accounts in a decentralized exchange, showcasing liquidity becomes a challenge. This issue be taken care of by a protocol like Uniswap.
Introducing liquidity pools
Looking from a different angle, the possibility of an exchange happening between a buyer and a seller in a centralized crypto exchange is a consequence of liquidity. In a decentralized exchange, instead of depending on the order books, the Uniswap protocol attempts to introduce a new method to enhance liquidity.
The Uniswap protocol guards a huge repository of tokens called the liquidity pool. The tokens are humongous in number and are placed behind top-notch security enabled by a smart contract. People can supply tokens to this liquidity tool, and they can earn interest out of the supplied tokens.
When a person wants to take a loan or exchange certain tokens, instead of depending on other books, those liquidity pools can provide the tokens when the tokens to be exchanged are received from the user. In essence, a liquidity pool functions as a bank.
The process of earning revenue from these liquidity pools is called yield farming. The multiple avenues of earning revenue in a decentralized ecosystem are enabled by a protocol like Uniswap.
Swapping is literally what it means! Since Uniswap is open-source, it supports the swapping of one Ethereum standard token with any other Ethereum standard token, and as you may have known, ERC20 is the Ethereum standard for tokens.
The way in which swapping works is simple and straightforward. Users will have to pick the type of token input and token output. The Uniswap protocol, with its oracles, calculates the value of the output token the user will receive.
Since everything happens within the blockchain ecosystem, the entire swapping process can be executed in a single click. The output of tokens will automatically be received to the crypto wallet of the user almost immediately.
The relative price of the two tokens being exchanged is calculated by an automated market maker (AMM) mechanism. Unlike centralized exchanges, Uniswap does not depend on order books and neither does the exchange price represent the magnitude of liquidity.
Deep diving into smart contracts
It would not be an exaggeration to say that a smart contract is the epicenter of the entire blockchain landscape. Smart contracts play a very important role in the DeFi ecosystem. Since there is zero human intervention and no intermediation from third parties, smart contracts have to be extremely accurate and reliable.
Smart contracts are rigid by nature. Once a smart contract is created, it cannot be tampered with. While this might seem like a disadvantage on the surface, it is the rigidity of the smart contract that assures security and trustability in a decentralized ecosystem.
Uniswap has two different types of smart contracts. One is called the exchange contract and it holds control over the liquidity pools. The same smart contract also enables the swapping of any Ethereum tokens with another. The other is called the factory contract and it is responsible for creating new exchange contracts and for registering new Ethereum tokens to the smart contract address.
What makes Uniswap unique?
Since Uniswap addresses one of the biggest challenges plaguing the DeFi ecosystem, it is considered to be a revolution for the decentralized world. It enables the automatic provision of liquidity without necessitating order books or mandating a central authority. There are a lot of reasons why Uniswap is among the most preferred protocols among crypto traders.
With Uniswap, you can be assured that you have complete control over the funds. Usually, in a centralized ecosystem, the user does not have access to the private keys of their wallet. However, in the Uniswap realm, the user always stays in control of their crypto funds.
Most crypto exchanges demand the completion of KYC/AML formalities. Although on the surface, it might seem like a great idea, it cannot be denied that there is some heavy compromise on the anonymity and privacy that the blockchain assures. However, in the Uniswap protocol, there is no need for you to reveal your personal identity. You can engage in swapping and participating in liquidity pools without completing these formalities in complete anonymity and with the assurance of privacy.
Uniswap makes sure that it is up-to-date with all the coins that comply with the ERC20 framework. When you participate in a crypto exchange enabled by Uniswap, you will have access to the newest and hottest coins in the crypto world.
Uniswap affects the entire process of swapping without bringing in any central custody.
In addition, Uniswap provides an option for almost every person to be an investor and to benefit from the returns of the liquidity pull through yeild farming.
Uniswap has been a promising case study for how a DeFi protocol can work out wonders and make strong, the case for decentralized finance replacing to traditional finance. This opens up opportunities for a lot of crypto entrepreneurs to consider starting their own DeFi protocol like Uniswap.
The relevance of a Uniswap Clone
Although building a protocol like Uniswap from scratch is not completely impossible, it would surely be a cumbersome and daunting undertaking. To save you from the pain, you can make use of a Uniswap clone. It is a perfect replica of Uniswap and is based on the open-source Ethereum blockchain. Out of the box, the Uniswap clone provides facilities for both swapping and automatic liquidity provision. Although it is customizable, it replicates all the intuitive elements of the user interface of Uniswap.
There are a lot of companies that provide Uniswap Clone script solutions. However, meticulous care has to be exercised in choosing the best provider. Whatever be the choice of your Uniswap clone development company, you will need to make sure that certain features are in place.
Your Uniswap Clone Script should support multiple cryptocurrency wallets. It translates into support for a vast variety of crypto coins and ERC20 tokens.
The architecture of the Clone Script should be advanced, so it does not put the entrepreneur into a burden of encountering high maintenance costs.
The Clone Script should be completely free of bags that interfere with the expected basic functionality of swapping and automated liquidity. The clone should also have a considerable degree of customizability, especially when it comes to smart contracts.
The clone should facilitate adding unlimited Ethereum tokens and should be able to create liquidity pools that allow all these tokens to be contributed.
Token swapping can be considered the pulse/ECG of the protocol. The swapping engine should be powerful and algorithmic.
As you may have inferred, the only step that a crypto entrepreneur needs to take is in finding the right Uniswap Clone development company. They will take care to understand your requirements and elements of customizability, so you have your own DeFi protocol in the shortest possible time.