Crypto Trending - Part 2
23 September 2020
In the previous article about DeFi and Yield Farming, we already had a basic look at how DeFi is operating as well as its impact on the entire Crypto market. In today’s article, we are going to look at the two extremely hot projects on the Crypto market at the moment: Uniswap and Sushiswap.
Traditionally, centralized exchanges like Binance have always controlled the entire Crypto market. The strengths of such traditional exchanges are high liquidity, high volume and fast transaction speed. However, centralized exchanges have encountered many problems regarding security or price manipulation in the market. That’s the reason why DEX (Decentralized Exchange) was born.
In the 2018-2019 period, DEX also had many problems, most notably poor liquidity, slow transaction speed, and lack of diversity in pairs trading. Launched in 2018, Uniswap is no exception, and that’s why it didn’t get a lot of attention at that time despite its cool technologies.
Uniswap is considered a decentralized exchange (DEX), but the word “exchange” has not fully described its properties. In fact, Uniswap is an automated liquidity protocol. When you want to trade a pair, Uniswap will automatically swap them for you (that explains “swap” in Uniswap) without needing intermediaries or order books. All you need to do is click on the swap button.
The question is if Uniswap is that good, why didn’t it thrive sooner but this time? If you remember, I have partly explained this in Crypto Trending Part 1. The main reason behind Uniswap’s explosion is the rising popularity of DeFi and the appearance of Liquidity Mining. A series of Defi projects was born and capital was constantly poured into Uniswap.
But why Uniswap, not Binance or any other DEX?
As mentioned, Uniswap requires no order books, instead, it works on the ANM principle (Automated Market Maker). ANMs are smart contracts that contain liquidity (money). The money in these smart contracts is provided by Liquidity Pools/Providers. In essence, Liquidity Pools will create a pool of liquidity by putting a large amount of coin (USDT, DAI, USDC, etc.) into smart contracts. They are willing to lend to everyone if there’s demand. In return, they will receive the interest as well as the fee that the trader pays when making the transaction.
Another question often asked by new players is: How do they determine the price if there’s no orderbook?
The answer is instead of determining the price of a coin, Uniswap will split it into multiple pools. Rather than setting the price for ETH the same as other exchanges like Binance, Uniswap will have a separate pool for ETH/USDT. We can call the amount of ETH in the pool X, and the amount of USDT in the pool Y. Uniswap will multiply X by Y to calculate the total liquidity in the pool (K). And then, Uniswap will set the price so that K will always be constant. For example, if the ETH/USDT pool has 100 ETH and 30,000 USDT, the price of 1 ETH would be equal to 300 USDT. Given that you put 300 USDT into the pool and take out 1 ETH, the price of ETH will increase and that of USDT will decrease, which means K always remains unchanged.
With this mechanism, ICO 2017 once again resurrected, and Uniswap is the new ETH.