Source

Uniswap is DEX based on the Ethereum blockchain which utilises a different market model in comparison to the other exchanges (both centralised and decentralised) in the cryptocurrency space. Instead of using the traditional order book of open buy and sell orders, Uniswap uses the Constant Product Market Maker model in which the liquidity pool is composed of a Ethereum and ERC-20 token pairing that is dynamically priced according to the formula x*y=constant (where x and y are the prices of the Ethereum and ERC-20 token respectively). This allows a predictable price to be determined for the buyer/seller in cases of low liquidity, a situation which (in a traditional order book model) could result in large orders destroying the order book and leading to sudden spikes and collapses of the order book... outcomes that are quite undesirable for a well functioning market.

Uniswap is currently one of the featured dApps on State of the Dapps (also found on Steem as @stateofthedapps) which are compatible with the My Ether Wallet (MEW) interface for the Ethereum blockchain. Currently standing at #54 in the listing of dApp rankings across multiple blockchains (Profile here).

About 6 months ago, I reviewed Uniswap after using it for a few months. The basic usage and details of how the exchange functions can be found here:

https://steemit.com/powerhousecreatives/@bengy/uniswap-2-month-review

I will quote the relevant section about the Constant Product Market Maker model, as it is central to how the exchange works and is the stand out feature which makes it such an enticing marketplace for tokens which have otherwise limited liquidity or demand.

Uniswap replaces the more familiar order book of buys/sells that are found at other exchanges, instead replacing each order book (for each ETH-ERC20 pairing) with a liquidity pool that is balanced with equal funding of Ethereum (x) and the relevant ERC20 token (y) according to the inverse formula (x*y=constant, where the constant is set at the creation of the of the liquidity pool). Liquidity providers (originally the order book) provide Ethereum (ETH) and the ERC20 token to the liquidity pool (in exchange for a liquidity token which represents their share of the pool, 0.3% which is comparable to the taker fees on most exchanges) according to this formula, and as the pool grows (through the addition of fees through swap that utilise the pool) their stake is worth more.

Swaps (trades into or out of Ethereum, or using Ethereum as a bridge) are given a quoted rate from the liquidity pool, which is based upon the same formula (trying to hold the constant constant), noting that the formula is an asymptotic one which means that the price will not scale linearly (swapping twice as many tokens does not result in exactly twice the price, but slightly more). So, not that different to buying up the order book... but with just a single price quoted instead. So, the price will only shift significantly if the swap order is significant in size to the liquidity pool.... if that is the case, then you are better off doing an Over the Counter (OTC) order instead.

Again, this is a far superior model for low liquidity coins. In a traditional order book model, if you wanted to buy or sell a significant amount of coins (relative to the liquidity pool), you would either have to put in a large limit order (or multiple small ones)... which might go unfilled for a long time... or never if the price shifts away from you. However, if you needed the tokens immediately, then you would be forced to put in a market price order... which would have the effect of significantly altering the price of the asset in an unpredictable way as you would liquidate the order book.

In addition, if you were using a DEX... placing a large order (limit or market) would allow other people to front run your order as the request would have to be transmitted and confirmed over the Ethereum network... other people could definitely use increased fees to the mining nodes to speed their front run orders ahead of yours.

So, the Uniswap Constant Product Market Maker model allows the buyer/seller a guaranteed price at time of purchase... and also an assurance that the order WILL be fulfilled. Something that is quite useful if you need the tokens immediately and aren't willing to waste lots of time monitoring a low liquidity token.

From a project development point of view, UniSwap allows a project to easily seed a liquidity pool at a commonly used and recognised DEX using an existing "factory" template.

Since last writing about Uniswap, there has been a great influx of various tokens from newly started (and older...) projects. In the last few months, I've used the DEX to pick up tokens of a few Ethereum projects that have caught my eye (Kleros, Synthetix and Civil just to name a few).... often you can get a better price here than on the project website... and it is much more efficient than trolling the various less reputable exchanges/DEXs which stock the tokens.

I've still a number of assets in the various liquidity pools... and with the depressed and fluctuating prices, it is difficult to analyse if they are providing a good return or not. The most ideal case is if the token and the Ethereum bridge are maintaining a relatively equal performance, in which case the liquidity pool grows at a 0.3% rate on each trade in both pairs. However, stability is not really a hallmark of cryptocurrencies... so, in the case where the price of the token outstrips Ethereum price (such as LINK)... you end up with a bit more Ethereum than tokens.... for the reverse case, you end up with more tokens than ETH.

A very interesting development that is likely to be rolled out in the coming V.2 update to the market is the ability to list and trade non-fungible tokens (NFTs) such as the all famous Cryptokitties. I'm quite curious as to how this would actually work... as it appears that the Constant Product model wouldn't really work for unique items. However, if there are enough of the similar TYPE of unique items (so, NFTs that are distinct but otherwise sharing the same characteristics other than unique ownership) I guess that could work... in cases of unique items (one of a kind), it would be a different proposition.

As a test of this NFT trading idea in the Uniswap market model, there was a fun little roll-out of UniSocks. So, NFT tokens that would digitally represent the ownership of a physical pair of UniSocks. So, it the NFT token would be redeemable at any time for the physical socks...

Conclusion

As I had mentioned before, this is a updated review of a previous review that I had written 6 months ago. In that previous review I had already laid out the basic theory and use behind Uniswap as a DEX and liquidity provider. This updated review covers some of the new developments that have been rolled out since...

I have used Uniswap quite a number of times as a both a liquidity provider and a buyer/seller of tokens. For tokens that aren't listed on the major exchanges, this is my preferred DEX to trade and acquire smaller cap tokens. Sure, you can possibily get a better price by trying to price snipe at Centralised exchanges... but the dodgy sites that host some of the lesser known tokens are big risk, plus they often charge stupidly high withdrawal (and sometimes even deposit...) costs. Other DEXs have a problem of having a unique bridge currency, slow network times and the risk of being front run. Both alternatives also suffer from the order book model which is not efficient for dealing with low liquidity tokens.

Uniswap really solves this problem elegantly, you do pay a small premium (due to the logarithmic nature of the price increase), but that is a price worth paying for the single purchase, pay and clear, experience. Plus, the known price that you are paying is also a definite plus! Some might complain that the website is not pretty (it isn't...)... however, it is highly functional... and what more do you need for a DEX?

5 stars out of 5 as a DEX with ease of use and an efficient and convenient market model.

Useful Links

UniSwap website
Uniswap Exchange
Uniswap FAQ
Uniswap Whitepaper
Uniswap GitHub

Uniswap Discord
Uniswap Twitter
Uniswap Reddit

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