What’s The Buzz Around Decentralized Exchanges?
With the advent of decentralized finances came a new protocol that has kept eager crypto traders on their toes – Decentralized exchange platforms, abbreviated as DEX. These exchange platforms brought with them an array of benefits that the centralized exchanges couldn’t give. Some of these solutions include reduced risk of hacking, mismanagement, and arbitrary fees. A few examples of such DEX platforms are 0x, Bisq, Bancor, and Binance.
These exchanges worked on the principle of order book exchanges. This method works well when there are enough buyers and sellers in the market. Because of lack thereof, a new decentralized exchange system fell into place.
This DEX platform solved the problem of liquidity in exchanges. One of the few drawbacks of DEX platforms was the lack of abundant liquidity for trading to happen more efficiently and swiftly, a reason as to why order book exchanges failed. This shortage made trading crypto a time-consuming process. Just then, Uniswap, a DEX protocol built on the Ethereum network came with a solution for this in the decentralized exchange landscape.
What Is Uniswap And Why Is It So Popular Among The Crypto Community?
Uniswap is a decentralized exchange protocol built on the Ethereum network that allows trading of Ethereum and ERC-20 tokens. In other words, it is an automated liquidity protocol that does not make use of an order book or a centralized authority.
But how is that possible? Most exchanges run on order books that facilitate smooth trading! Here’s where Uniswap shows it’s supremacy. It uses something called Constant Product Market Maker which is also known as Automated Market Maker (AMM). These are nothing but smart contracts or rather liquidity pools that hold reserves that traders can trade, solving the issue of liquidity in exchanges. Anyone can lend their crypto assets to these liquidity pools for benefits which will be discussed later.
The smart contracts employed in platforms like Uniswap are of two types – the exchange contract and the factory contract.
The exchange contract controls the functions of depositing assets to liquidity pools and swapping of ERC-20 tokens.
The factory contract adds or rather creates new exchange contracts and adds new tokens to the Exchange addresses.
These features and many others make Uniswap one of the most popular Decentralized exchanges, accounting for around 95% of all DEX trades. It has around 38,000 daily users and two other versions of the protocol have also been developed.
Several DeFi application developers offer entrepreneurs and businesses a chance to enter the remunerative field of decentralized finance with their own protocols like Uniswap and we, at BAF, provide the same and more. You too can invest and create a DEX exchange like Uniswap. Explained in this post is why creating a DeFi protocol like this can benefit users and your business.
What Is The Workflow Of Exchanges Like Uniswap?
Protocols like Uniswap are an open-source platform. Traders using the platform will need to have an Ethereum address, using a wallet like MetaMask. Users will be able to swap ERC-20 to ETH, ETH to ERC-20, and ERC-20 to ERC-20. The users simply have to pick the type of token, the amount they’d like to trade, and the protocol calculates the output token the user will receive. After the swap happens, the interface shows a pop-up that will display the minimum value received, price impact, and liquidity provider fee. So, for the tokens to be exchanged and swaps to happen, there needs to be a reservoir of tokens, that is provided by the liquidity pools.
Let’s take an example of how swapping works in DEX platforms like Uniswap, in the ETH/ USDT liquidity pool. Suppose you want to trade 1 ETH for 300 USDT and the trade happens. Now, the amount of USDT in the pool is lowered, increasing the value of ETH. This is what determines the price of tokens, in this case, the ETH. Continual trade facilitates change in the price of cryptocurrencies in platforms like Uniswap.
What Are Liquidity Pools And How Do They Work?
These special reservoirs are filled by liquidity providers. Anyone can provide crypto assets into these pools but on one condition. If they are contributing two ERC-20 tokens, it needs to be of the same value/equivalent value. The same logic is applied even for Ethereum and ERC-20 tokens. Based on their contribution to the pool, the providers are rewarded. This is because their contribution has facilitated more liquidity, reducing the chances of slippage.
Liquidity pools work on a principle described using a formula – x*y=k
Following up on the previous example, we can label the ETH part of the liquidity pool ‘x’ and the USDT part of the pool ‘y.’
What DEXs like Uniswap does is multiply these two values to figure the total liquidity of the pool, called ‘k.’ The core idea on which protocols like Uniswap are built is the fact that the total liquidity, k must remain constant.
Every time a provider deposits new Ethereum (ETH) / ERC-20 tokens, the liquidity pool generates a ‘pool token.’ This happens every time a provider contributes to a particular pool. These pool tokens (which are ERC-20 tokens) can be collected and exchanged and used in other decentralized applications. These liquidity deposits can be freely added and removed from each contract. These additional benefits make liquidity pooling a profitable effort.
What Are The Advantages Of A DEX Protocol Like Uniswap?
Apart from providing a platform that is not controlled by a centralized authority and with no order books, DeFi protocols like Uniswap provide other benefits for users –
- The Ethereum wallets that are integrated will allow full control and custody of funds.
- No KYC and ID verification is necessary for trading and providing liquidity.
- Several of the newest and top trending coins are available for trading on such platforms.
- Flash swapping can be done without the arduous tasks of multi-step transactions.
- An individual only needs an Ethereum address to deposit in liquidity pools and earn money out of it.
- In the updated version of exchanges like Uniswap, any Ethereum based tokens can be traded, without any listing fees. They just need to be paired with the equivalent ERC-20 tokens.
- It has a very low gas fee – only 0.3% that goes to the liquidity providers.
- No third-party integration. This guarantees the security of crypto assets and data.
How Does A Business Person Benefit From Developing Their Own DEX Platform Like Uniswap?
So, you’ve decided to invest and develop your own DeFi platform like Uniswap. And like any business, you will need to witness profits as well. Listed below are some of the perks a protocol like Uniswap will provide.
- Protocols like Uniswap provide several trading activities and functions like Yield farming, staking, trading, liquidity pools, etc.
- This can lead to witnessing very high returns.
- Since DEX is completely decentralized and runs on the Ethereum blockchain, there is no necessity for manual power.
- DEX platforms like Uniswap dominate over 90% of the global exchange space so this will lead to an increase in trading volume and users.
- Developing DEX platforms are trending in the DeFi exchange ecosystem so developing and launching your own platform in this lucrative market will improve brand visibility and increase user engagement.
- The investment required is less and the risks involved in launching a decentralized exchange are considerably low.
Why You Must Pick BAF For The Development Of Protocols Like Uniswap
We are pioneers in developing solutions for the Decentralized finance sector since our experience and proficiency in development is unmatched. Our white label solutions and feature-filled Uniswap like protocols will warrant user engagement with the application. The intuitive user interface that is requisite in all our solutions will let your DeFi protocol like Uniswap take a spot in the limelight in the Decentralized exchange ecosystem. Connect with us readily to learn more.