Uniswap is a decentralised exchange (or DEX): a cryptocurrency marketplace that isn’t run by a central authority. UNI is a cryptocurrency that was originally created to reward investors for participating in the Uniswap exchange. At the same time, UNI is a governance token, meaning that people who have UNI can vote on proposed updates to Uniswap.
How does the Uniswap exchange work?
Uniswap is built on the Ethereum blockchain, and it allows users to trade ERC-20 tokens. ERC-20 is the most commonly used standard for creating new cryptocurrencies, so Uniswap supports tens of thousands of trading pairs.
Let’s say someone wants to trade some LINK for USDC (both of these are ERC-20 tokens). Uniswap is programmed to automatically calculate a fair market price, based on the supply and demand of each cryptocurrency. For example, if the Uniswap protocol calculates the price of LINK to be worth 16 USDC, someone can “swap” 1 LINK (plus a small fee) for 16 USDC.
But where does Uniswap’s supply of tradable coins come from? Instead of trading one cryptocurrency for another, people can also choose to add their crypto to Uniswap’s supplies. These coin supplies are known as liquidity pools, and the people who contribute crypto to the pools are known as liquidity providers.
The fees paid for every Uniswap trade are distributed proportionally among the liquidity providers. So, if a liquidity provider contributed to 1% of Uniswap’s LINK/USDC pool, they would essentially earn 1% of all the fees charged for LINK/USDC trades. This isn’t a guaranteed profit, though: it can be much more risky to be a liquidity provider compared to simply storing cryptocurrency in your own wallet.
And what is UNI?
The cryptocurrency UNI was originally created in September 2020 to reward people who’d participated in the Uniswap exchange up to that point. Today, UNI works as a tradeable cryptocurrency like any other; you can buy and sell it without participating in the Uniswap exchange at all.
At the same time, UNI also has a deeper function as a governance token: Uniswap users can delegate their UNI tokens to vote on proposed updates to the way Uniswap works. This means that UNI’s value more or less corresponds to how much Uniswap’s participants are willing to pay to gain more voting power.
Tip
Keen to explore Uniswap a bit more? You can learn about Uniswap basics and get all the latest cryptocurrency news on Luno Discover.
Want to know how to buy, sell, send, or receive UNI? We’ve got answers in the following help articles:
This information is not intended to be nor does it constitute financial, tax, legal, investment or other advice; nor is it a call to trade. The information is intended as general market commentary for information purposes only. Before making any decision or taking any action regarding your finances, you should consult a qualified Financial Advisor.