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What is Uniswap?
Uniswap is a cryptocurrency exchange for tokens on the Ethereum blockchain (ERC20), and UNI is the platform’s native token. The platform’s primary aim is to provide a seamless cryptocurrency exchange experience with minimal liquidity issues.
Exchanges generally use an electronic list of buy and sell orders to facilitate market activity known as an order book. However, order books have a large number of orders and cancellations, so they are not ideal for Ethereum because it can only process 12-15 transactions per second and has a 10-19 second block time.
Uniswap offers a solution in the form of liquidity pools: individual pools of ERC20 token pairs. These pools ensure the exchange remains liquid whilst also preventing the blockchain from being overwhelmed by a large number of orders. The tokens are constantly available in the pools so can always be used for exchanges. UNI tokens are paid to those who lend to Uniswap’s liquidity pools, and these individuals are known as liquidity providers. Holders of UNI tokens can also vote on platform governance.
How does Uniswap work?
Uniswap works by using liquidity pools to allow convenient, seamless exchanges of cryptocurrencies to take place. Each pool is filled with a pair of cryptocurrencies, and users can freely exchange tokens in any pool paying a 0.30% transaction fee. The liquidity providers who lend these tokens into pools are incentivized by receiving part of this fee denominated in UNI. When liquidity providers burn their UNI tokens, they receive their portion of the pool plus any accrued fees.
Like Bitcoin, Uniswap is democratically governed. Holders of UNI tokens can contribute to development and governance decisions, influencing and voting on things like grants, liquidity pools, and partnerships.
The system is designed to run smoothly and efficiently, allowing users to exchange ERC20 tokens quickly with no central regulatory authority. Tokens are always present so exchanges can occur constantly with no hiccups, and the Uniswap platform has become so popular that spin-off platforms have been creating using its technology, such as SushiSwap.
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