Uniswap (UNI) is a decentralized token exchange protocol which is modeled entirely on the atomic swap concept. It refers to a type of smart contract where burn and mint tokens in equal proportion when order matching occurs with set price parameters.
Intended for use primarily in Ethereum based networks, uniswap enables you to trade one token for another at current market prices without any need to use a third party exchange.
The name of the project is an acronym which stands for “Ethereum Universal Swap”. The project was founded by one of the co-authors of the original Ethereum whitepaper, Vitalik Buterin.
UNI tokens are used primarily to pay for trading fees on the platform. This is one of the only ways users can get rid of their UNI tokens, since no other purpose was found for them after testing phase.
The protocol uses what is known as state channels. State channels were initially proposed by Ethereum co-founder, Jeffrey Wilcke in 2014 and are being actively used in major blockchain networks such as Lisk, Zilliqa and Loom Network.
State channels are created when users enter smart contract agreements exclusively between themselves. This makes it possible for them to transact with one another using public keys. Transactions made in this manner are recorded on the Ethereum blockchain but happen off chain, meaning they do not bloat the network and cause transaction fees to rise.
To make a trade using a state channel, users must first send their public inputs to each other’s Ethereum addresses through a smart contract which acts as an escrow agent. The offered price is recorded on the blockchain for transparency purposes. In case something goes wrong, one of them is able to activate the smart contract which will see the tokens released to each of their respective wallets.
Once they have put up their offers, users are able to place new orders at any time. The optional feature can be used by those who wish to wait for better prices on exchange rates without having to close their order first. After this, they are required to generate a hash which will be used to match orders without the need for further communication.
Every transaction that happens within the network is recorded on the blockchain at all times. The method makes it difficult to cheat since you can easily review any order using publicly available data stored in smart contracts.
Sending tokens to an exchange can be a hassle since you need to fund an account and often face long withdrawal periods. With the uniswap protocol, all transactions happen instantly as they do on centralized exchanges. As far as volatility is concerned, uniswap holds a certain appeal since tokens are exchanged at their current market rates which tend to oscillate more than usual.
Atomic swaps are very important in the sense that they will allow for easier blockchain interoperability and greater levels of decentralization. The uniswap protocol is a good step forward in both areas, but there’s still room for improvement before it can become mainstream. Right now, only Ethereum based tokens can be traded on the platform, but it can use tokens from other platforms as well. The project also lacks liquidity at the moment which is necessary for any decentralized network to succeed.
