What is Uniswap?

Uniswap is one of the largest and most widely-used decentralized exchanges (DEXs) operating on the Ethereum blockchain. As a decentralized platform, it allows users to trade ERC-20 tokens without the need for intermediaries. Instead of relying on traditional order books, Uniswap employs an automated market maker (AMM) model, providing an efficient and decentralized way for users to trade, supply liquidity and participate in the governance of the platform through the UNI governance token. Uniswap has become a key player in the DeFi ecosystem and continues to innovate with the release of Uniswap V3 in 2021, which introduced several major improvements over its predecessor, Uniswap V2.

How Uniswap works

Uniswap's AMM system relies on liquidity pools rather than traditional order books. Users called liquidity providers (LPs) deposit tokens into a liquidity pool, and in return, they receive LP tokens representing their share of the pool. These pools enable decentralized trading by automatically adjusting token prices based on supply and demand.

Released in 2020, Uniswap V2 introduced several enhancements over the original protocol:

• Direct ERC-20 token swaps: V2 allowed users to trade directly between any two ERC-20 tokens, without routing trades through ETH.
• Flash swaps: flash swaps let users withdraw assets and only pay for them at the end of the transaction, allowing for more advanced DeFi strategies.
• Improved oracles: V2 improved on-chain price feeds to increase reliability and accuracy, making them more resistant to manipulation.

Uniswap V2 remains popular and functional, especially for less active liquidity pools, but V3 now handles the majority of volume due to its more advanced features.