The emergence of the decentralized exchange platforms has been important to the development of the crypto sector. It allows traders to engage in the crypto market securely without having to hand over control of their funds to a centralize party. Besides crypto trading, decentralized exchange platforms are also enabling the faster launch of Initial Exchange Offering. One of the most interesting decentralized platforms to emerge in the recent past that supports IEOs is Uniswap.
Disclaimer: Decentralized exchanges are not regulated trading platforms. The purpose of this article is to describe the technical workings of the Uniswap decentralized exchange. All the information in the article is provided with the express purpose of information. It should not be construed as the basis for listing or investment advice.
Uniswap is a set of computer programs that are built into the Ethereum program. These programs allow users of the blockchain to conduct decentralized token swaps. When using the Uniswap platform, users can Exchange their Ethereum tokens without relying on a third party to hold on their tokens. The Uniswap platform also provides users a way to earn via liquidity pools. Users can lend their tokens to these liquidity pools and earn a fee.
Uniswap’s unique model has proven so popular with crypto traders that trading volume on Uniswap surpassed that of Coinbase on September 2, 2020.
How to Trade on Uniswap
Uniswap was created as an open-source protocol. It means that anyone can create frontend applications for it. However, the popular one is https://uniswap.exchange. To use the exchange, you can follow these simple steps:
- Ensure you have an Ethereum-compatible wallet such as MetaMask
- Visit the Uniswap interface
- Select the token you want to acquire
- Pick the token you wish to exchange it for
- Click “Swap”
- A Pop-Up window with a preview of the transaction will appear
- Confirm the transaction request in your crypto wallet
- Wait for the transaction to be registered on the Ethereum blockchain
Conducting an IEO via Uniswap
If you are planning to launch a crypto-based project, one of the ways to do it is by conducting an IEO. However, the reality of the current crypto world is that you need to do it via a centralized crypto exchange.
For projects seeking an alternative for holding IEOs, there is now an alternative.
A Simple Guide on Holding an IEO
The simple guidelines below demonstrate how to conduct an IEO via Uniswap.
Before listing on Uniswap, it is important to have the following things to avoid any delays:
- An Ethereum compatible wallet such as MetaMask
- ETH, which will cover the network fee and provide liquidity for the token
- The address of the token, which can be retrieved from a block explorer
1. The first step is to unlock the wallet and connect it to Uniswap
When the MetaMask notification popup appears, click on confirm. It is now connected Uniswap
2. Navigate to the “Pool” menu and click on “+ Create Pool”
3. In the screen that appears, you will need to choose a complimentary token that will provide liquidity. For this example, the token is ETH. When the MetaMask popup notification appears, click “Confirm”
4. In the token selection, paste the address of the token and click “Create Pool.” At this point, you need to offer a counter value for the tokens. It will be used to determine how many tokens one can get for each ETH token. In short, you are creating the Initial Exchange Offering (IEO) price.
5. Once you are done, click on “Approve (token’s name)”
When the MetaMask popup notification appears, click “Confirm”
6. All that remains is to create a pool and then click “Supply” to confirm the transactions with the parameters you entered previously
If you wanted to hold a $1M token sale, you could set aside a set percentage of tokens and then fund the liquidity pool with ETH of a given value. The goal would be to ensure that the initial price of the tokens based on IEO target would be achieved based the amount of ETH and the IEO token supplied.
For instance, if you wanted to hold a token sale for project with a fixed supply of 100 million tokens, you could decide to place 2 million of those tokens in the Uniswap IEO pool. You could then place ETH worth $500,000 in the pool to create a counter value of value of ETH/Number of Tokens.
It would work out to:
The $0.25 would be the initial price offering of the tokens. It would imply that the total market cap of the tokens would be around $25 million. From there, it would be up to market forces to set the prices. Consequently, the team would still need to do the hard work of ensuring they market the IEO to ensure there is enough demand for the tokens to help them raise funds.
When the MetaMask popup notification appears, click “Confirm”
- Now visit the “Swap” section on Uniswap and paste the contract of the token to start trading.
Please note that as the first liquidity provider the ratio of tokens that you add will set the price of the pool.
You will need to promote the sale aggressively to get people to purchase tokens in your project.
Initial DEX Offering Example Projects
A number of DeFi token offerings have already been held on decentralized exchanges. Some of the most notable recent examples are:
The UMA IEO was held on the Uniswap DEX on April 29, 2020. During the IEO, the initial token price was set at $0.26, according to the process described above. The team behind UMA set the initial market cap at $2 million. The current price of the tokens is around $16.77.
On the day of the IEO, backers of the project placed 2 million UMA tokens of the total 100 million tokens in a Uniswap Liquidity Pool. The complimentary token for the pool was ETH and $535,000 in ETH was used. It ensure that the listing price worked out to around $0.26 per UMA.:
The COMP tokens were launched on May 16, 2020 while the IEO was held on June 15, 2020 on the Uniswap DEX. During the IEO, the price was set at $34 and the initial market cap was set at $38 million.
In May 2020, the creators of Compound outline the token distribution scheme for the COMP tokens. Around 4.2 million of all the 10 million COMP would be set aside in a Reservoir contract. After each Ethereum block, 0.5 COMP would be proportionally distributed to lenders and borrowers of the Compound platform.
Distribution started on June 15, 2020 with 2880 COMP tokens released per day. Within hours of the process starting, someone created an anonymous liquidity provider created a COMP-ETH market on Uniswap, thereby creating an Initial DeFi Offering by default. On the first day, the price of COMP spiked from around $34 to over $60. The current price of COMP tokens is around $167.84.
The DXD tokens were launched on May 20, 2020. The initial price was set at $68. Currently, the tokens are selling at around $261.66. The tokens are the native token of DXdao ecosystem. DXdao announced on May 2020 that it would launch a “continuous token offering via a bonding curve” to raise funds using the DXD tokens. With the bonding curve, around 300,000 in ETH would have been raised when 12,000 DXD was issued. The total supply of DXD token is over 124,000 and they can be traded on Uniswap.
The BAL tokens were launched on June 23, 2020. They came with an initial token price of $6.65 and an initial market cap of $435,000.
When BAL tokens were listed on Uniswap on June 23, 2020, the initial price spiked to around $15 per token from $6.65 per token. The price settled at around $10.5 after two week. Today, the tokens are priced at around $20.25. There are 100 million BAL tokens in total.
How Uniswap Works
Now that you understand how to hold an IEO on Uniswap, how exactly does the platform work? Here is a simplified explanation:
Uniswap, unlike traditional crypto exchanges, does not come with an order book. It works on a unique design known as the Constant Product Market Maker, a variant of the Automated Market Maker (AMM) model.
AMM operate as smart contracts that hold liquidity reserves, which a trader can trade against. Liquidity providers fund the liquidity pools. To be a liquidity provider, a person has to deposit an equivalent value of two tokens in a pool. The traders then pay a small fee to the pool, which is distributed to the liquidity providers as a reward. The reward is distributed according to a provider’s share in the pool.
In essence, a liquidity provider will create a market by depositing an equivalent value of a pair of tokens. The tokens can be ETH and an ERC20 token or two ERC20 tokens. The pools often comprise of stablecoins such as USDT, DAY, and USDC. In exchange, liquidity providers receive liquidity tokens, which are a representation of their share in the pool.
Let us use an example of a liquidity pool X/Y. On Uniswap, the protocol will take the two quantities and multiply them to calcite the total pool liquidity, a value we can label Z. The idea behind the Uniswap platform is that Z must always remain constant. Thus, the formula for total pool liquidity is X*Y=Z.
When someone decides to make a trade, the exchange one token X for another token Y. By doing so, they increase the number of Y tokens in the pool while reducing the number of X tokens in the pool. The result is that the price of X tokens will go up since there are fewer X tokens once the transaction is complete and total liquidity Z, has to remain constant.
On Uniswap, this is how pricing is determined. It is worth mentioning that in this model, things do not scale linearly. The larger an order is, the more expensive it is and the more the slippage there is. To avoid issues, the liquidity pool has to be bigger, which leads to smaller shifts between the X and Y tokens.
How Uniswap Makes Money
Uniswap, as it is, does not make money for its developers. It operates as a decentralized protocol without a native token. The transaction fee is currently set at 0.3% per trade.
The funds go to the liquidity pool but liquidity providers are at liberty to redeem the fee at any time. Each liquidity provider gets a fee proportionate to his or her share in the pool.
Of the 0.30% fee, 0.25% goes to the liquidity providers while the remaining 0.05% goes to the protocol.
Alternative to Uniswap
Like all great things in the crypto world, you can be sure you will find an alternative. One of the alternative platforms to Uniswap is bounce.finance. The founders of the platform believe that like an auction, token swaps should take place competitively with limited token supply and time limits.
Bounce Finance wants to rebuild the token swapping works with improvements based on the positive aspects of Yearn Finance and the Uniswap platform. While the platform has a few differences to Uniswap, it supports the launch of an IEO, just like on the Uniswap platform.
Another alternative is is the Liquid Swap platform that was recently launched by Binance. Liquid Swap is a centralized AMM platform, which is one of a kind in the crypto space.
The Benefits of Using Uniswap for an IEO
One of the main benefits of using Uniswap for an IEO is that there is no fee. On most centralized exchanges, users have to pay a fee to be listed, which can be significant, based on the prominence of a crypto platform.
Another benefit of using Uniswap is that there is no lengthy KYC process. The KYC process can be off-putting for some investors. They simply do not want to give up all their details to take part in a project that is still in the formative stages. Using Uniswap helps to ensure users do not give personal details.
Another benefit of using Uniswap is that it is experiencing growing liquidity. It provides rewards to the liquidity providers, which will encourage more token holders to provide liquidity and earn a passive income.
With Uniswap, you can trade and hold tokens within the ecosystem and remain fully decentralized without having to interact with any centralized platform.
It supports the ability to create an exchange for any ERC20 token
Cheaper than other decentralized exchanges
Uniswap can be expanded upon, which allows the creation of custom pools, adding flexibility for developers.
The front-end React app can be forked and used on test-nets. It allows developers to experiments with pooling and swapping tokens risk-free.
Downsides of Uniswap
One of the main downsides of using the Uniswap platform is that there are no KYC requirements or legal compliance. It increases the chances of scammers taking advantage of the platform to defraud traders since there is no way to track them down.
The initial liquidity for the IEO will need to be provided by the project creators. It could be quite significant depending on the fundraising goals. However, these funds only provide liquidity and they are at limited risk. One of the solutions to this issues would to leverage De-Fi lending solutions.
Uniswap is an innovative protocol that allows anyone with an Ethereum token to exchange tokens without a third party. While it comes with some limitations, the technology used to create the protocol shows a lot of promise for the future of trustless token swaps.