Exploring Crypto World #1 - Uniswap
With a variety of functions and governance principles, Uniswap provides an interesting model to incentivise purposeful investment over passive profit-taking
So far I have stressed the importance of utility and function as a way to distinguish between cryptocurrencies. You have seen me harp on about the dichotomous relationship between Bitcoin and Ethereum, and why I would prefer the latter in a straight comparison. But I have never ventured beyond the two giants of the crypto world and delved into the fascinating world of cryptocurrencies with great detail. Let today be the start of this as I give you the synopsis on Uniswap.
Unsiwap was one of the many cryptocurrencies which expanded at a rapid pace towards the end of 2020 and start of 2021. Jumping from $3.50 to $44 from Christmas to May 2021, Uniswap is a symbol of the rapid monetary gain to be made in the short-term on the path to realising a longer term vision. With a variety of functions and governance principles, Uniswap provides an interesting model to incentivise purposeful investment over passive profit-taking.
Products
App
The flagship function of Uniswap is to provide liquidity to people buying and selling cryptocurrency without involving third parties to maintain maximum control over the private details of users.
If you were to use a conventional exchange for buying, selling and converting cryptocurrencies, it would require another user to exchange your 'offering' for an agreed upon value. Think of it as you buying an apple in exchange for $5. You have to find someone to supply the apple at the same price for an exchange to take place.
Say you just moved from the city to a country town. Suppliers of apples are harder to find, and a supplier with an appropriate price is even harder. But not too far away there is a giant bucket. Its full of two things: Apples and $5 bills. You can visit it at any time and you can exchange one item for the other at any time, without having to interact, and negotiate with another vendor but instead have to pay a tiny fee to exchange the two items.
Now replace the apples with a cryptocurrency that you want to buy for $5 (This money representing any currency you're willing to exchange for your desired purchase). This is the function of Uniswap's main application, which is referred to as liquidity pools. Think pools of money that other people put there.
How did the money get there? Other users put a bit of both currencies (each currency equal to the value of the other) in this pool in return for 0.3% of the transaction fees.
What happens when the price of one of the items significantly changes (a near certainty in the world of crypto)? This creates something called an arbitrage opportunity.
Back to apples and $5. Before you found the bucket, you tried buying apples from a vendor but they offered $6 an apple. You can now get an apple for $5 and sell it for $6 (let's just pretend they willing to buy it for what they're selling at - like a currency). This is an arbitrage opportunity. This gets eliminated because you're not the only one to figure this out. Everyone who realises this opportunity tries to undercut their competitors and offers it the vendor at a lower price $6, until everyone is selling it to the vendor at a value that is indiscernible from the price of the exchange.
Analytics
Uniswap's analytic application allows users to collate data regarding liquidity (Uniswap's primary focus) of tokens as well as their trading volumes, price changes and individual transactions. The transaction analysis is especially useful for identifying trends towards certain currencies on a given day, helping to provide perspective on any near-term price speculation by traders.
This tool helps contribute to the modus operandi of the Uniswap project which is to provide transparency through a user-friendly interface, making information digestible for a wide range of users.
Token Lists
One of the early concerns regarding cryptocurrencies was the unregulated ease at which these companies could raise capital through ICOs (Initial Coin Offering), which is basically the issuance of currency. There's nothing inherently wrong with this, businesses do this all the time with shares. The problem was that there was no real standard or process which could distinguish genuine projects from the scams.
One of the solutions is the community driven token list which Uniswap has facilitated for all ERC-20 tokens (cryptocurrencies built on the Ethereum network). It acts as a standard for genuine projects and is designed to give these projects status similar to a technology company being on the NASDAQ.
This tool helps potential investors to discover exciting and new projects in a scam-risk adjusted environment.
Sybil
To further expand the transparency of Uniswap, they have created a governance monitoring system called Sybil. Sybil provides lists of every single user in the order of the influence of each corresponding user's voting rights, so that potential investors can review the tendencies of the major voters when governing decisions are being made.
Socks
By far the most niche of Uniswap's applications, 'Socks' is a unique token that can be exchanged for other currencies, with each Sock token you own, you can redeem an actual pair of socks, shippable to any place in the world.
As the price rises after each purchase from the pool of Socks, a price which initially started at $12 (USD) has risen to roughly $42,000 as of July 2021. Why buy a Sock today? One answer is price speculation. The other? To make a bet on internet culture and the future of digital art and 'smart objects.'
Governance
The core tenets of Uniswap's philosophy is neutrality and trust minimisation, as stated on their website. With this in mind, the governance system is designed to have the least possible influence on the state of the currency, focussing on protocol development and expansion of the Uniswap ecosystem only.
The governance is community led, with voting power distributed through ownership of the UNI token. The distribution of future tokens at a rate of 2% every year is designed to incentivise active community participation rather than passive investment, with the distribution model favouring active members.
Takeaways
The main aim of Uniswap is to provide liquidity of tokens (To make them more easily exchangeable)
Through their exchange system, no third party is required for the transaction, meaning more security
Uniswap's incentive structures are designed for active participation by liquidity providers and other community members
Coming Soon...
A Bubble Ready to Pop?
Success on the Horizon
Thanks Oscar - great to get this direct insight - had heard of uniswap before but knew nothing about it. This makes it clear and easy to understand.