Imagine you’re a farmer from a couple of thousand years ago. In this scenario you farm potatoes you can do a lot with a potato; you can make French fries, mashed potatoes, hash browns a lot of useful and tasty things. However, because you’re a potato farmer, you grow all the potatoes and wish to try something that doesn’t grow in the ground, so you want a full juicy bright red apple to enjoy. Now, remember this is a few thousand years ago. So how are you going to get that apple, well you know a friend who has a friend who farms apples? So you make the trip over to his apple farm, and you ask him if you can have some of his apples if you’ll share some of your potatoes. He kindly agrees since he’s also sick of apples, and you guys make the trade.
Now there was no intermediary; there were no fees, no taxes, and you didn’t have to show them your driver’s license or anything. You just traded a raw material with someone else. Now, let’s fast forward to about 10 years ago, let’s say you grew potatoes in your backyard and decided that you wanted an apple. How would you go about this, well I would try to sell my potatoes for some cold hard cash on something kind of like a Facebook marketplace? Then I’d walk to my local grocery store and use my new cash to buy an apple. The cash is used as a currency, unlike what we had before cash doesn’t go bad, but potatoes do so.
You decided to sell all your potatoes as quickly as you can so that you can save up cash to buy apples whenever you want or any other fruit for that matter, even if it’s grown on the other side of the world. You can pay a small fee for almost any fruit that you want at your local grocery store. In this scenario, now we are using a currency to trade, something to meet in the middle, so we don’t have to go to that apple farmer or the pineapple farmer or the coffee bean grower, and we don’t have to have a conversation with them. Instead, we can have an intermediary, like the grocery store, always keep stock of our favorite fruits to buy them whenever we want and very easily. We pay the supermarket a fee so that they can stay in business and so that they have a reason to keep stock for us.
So now we’re using currencies and paying fees, but at least it seems to make our life a little easier with a little bit more variety as time goes on, the supermarket wants to make more money. So what do they do, they increase their fees. They know that you can’t go to the other side of the world to talk to that coffee bean grower, so they can charge almost whatever they want.
Imagine you wanted to find that original apple farmer and trade your potatoes with him again, so that way you avoid having to switch your potatoes to cash and then cash to apples. So you don’t have to pay the fee well, this is basically what Uniswap is. The Uniswap exchange lets you swap any Ethereum token for any other Ethereum token, and you pay a very small fee.
5. Trade Example
It does this by essentially being the grocery store, but without cash. See, Instead, you give them your potatoes and they immediately give you the apples. So how do they do this Well, they keep a very large bin in the back with a ton of apples and potatoes. So that anyone who wants to can make a trade if someone comes in and buys a ton of apples, so there are not many apples left in the bin, then the grocery store just starts charging more potatoes for each apple. They’ll make you pay two potatoes for each apple, and then they’ll make you pay three potatoes for each apple until someone comes in with a bunch of apples and restocks the supply.
If this example is making sense to you, we’ve done our job, now to extrapolate this example, Let’s say your potatoes are Ethereum and the apples that you want to buy are basic attention token, which is a pretty popular Ethereum token, when you give the grocery store, which is uni-swap in this case, your Ethereum. They give you a fair market price of basic attention Tokens. Now, after you’re done, the price of the basic attention tokens rises because there’s less of it since you bought it and the price of Ethereum drops because there’s more of it since you sold it to them. It's basic supply and demand within the grocery store, but this is Uniswap, so the next guy that comes along and wants to trade will have to buy basic attention tokens at a higher price or sell some Ethereum at a higher price.
In some cases, a trader may be able to buy Ethereum for two thousand dollars at coinbase and sell it to Uniswap for two thousand fifty dollars making a profit, even though what they’re doing is just evening out this liquidity pool that way, Uniswap or The grocery store has an even amount of potatoes and apples or Ethereum and basic attention token. Now, this is essentially what an automated market maker is, but this also begs the question: where is all of that Ethereum and basic attention token, coming from in the first place Well, it’s time to bring out some technical terms.
8. Liquidity Pool
First, in this analogy, the grocery store in Uniswap is called a liquidity pool. Now, there’s a pool of Ethereum and basic attention tokens, with a ton of coins of each of them, and the prices of each, are such that as more of one is traded up, the other is traded down. Secondly, we call the place where the coins come from liquidity providers because they provide the initial liquid assets to the pool.
9. Liquidity Provider
You can become a liquidity provider very easily. You just have to give your money and your tokens to the uni spot pool boom, you’re, what they call an LP, but why would you want to be an LP (Liquidity Provider) Well, remember when I said there was a very small fee to trade on Uniswap well, that fee doesn’t go to the government, it doesn’t go to Uniswap, but it goes to the actual investors of Uniswap the liquidity providers. That way, we can reward them for allowing us to do quick swaps of our coins, even if the fee is .03% for each trade. If 10 trades are using your coins a day for a whole month, that’s 9 a month which is 108% ROI for any liquidity provider, which is 108% return on your investment. Now you should know, that there are two main uses for Uniswap, you could be a token swapper and change your Ethereum for basic attention.
Token for only point zero, three percent, which maybe you want to do in fact, Uniswap currently has over one billion dollars of trading volume each day or you could be a liquidity provider and earn a return on your investment by lending it to the pool. Right now, there are nine billion dollars in all of the pools that Uniswap has now. This is the foundation of Uniswap. You should know that it’s also all code; it’s just being run by servers. There’s no regulation on it, there are no taxes. Technically, there’s not even someone to stop it.
If they wanted to, someone could just start another server and run the program. It functions like a foreign bank allowing you to change your United States dollars to Canadian dollars than to Indian rupees, then the Japanese yin, but it’s also decentralized. So there’s a super low fee and absolutely no taxes, see if the Uniswap exchange did not exist, You would have to sell your Ethereum, then you’d have to find an exchange that allows you to buy basic attention Token and not all exchanges have both of these, so you might have to change from one exchange to another exchange. Uniswap solves a big problem so far in this article I’ve been talking about the Uniswap exchange the decentralized application that allows you to swap Ethereum tokens at Uniswap.org. Now you should know that there’s also a Uniswap token, an Ethereum token that represents the decentralized application.
The Uniswap token is created hand in hand with the Uniswap exchange when you buy the Uniswap token right now, You really can’t do anything with it, but down the road token holders should be able to make votes to specific changes on the exchange. For example, since I said nobody controls it technically, its code and token holders could agree to change something if they wanted to. So if you hold a bunch of Uniswap and wanted to raise the trading price from point zero three percent to point zero six percent – in fact doubling the fee.
12. Voting System
Theoretically, you could vote on that, but right now they haven’t implemented a voting system. The token has no intrinsic value at the moment, but it does represent the exchange and the exchange is very valuable and has a very useful purpose. Another reason for owning the Uniswap token is that one day a percentage of all the trades happening might go to the Uniswap token holders as well, basically earning them passive income, the same as a liquidity provider.
I hope you’ve enjoyed this article and hopefully learned a bit about this booming new technology and the decentralized application called Uniswap.
Thanks for Reading.