Introducing DeFi
The world of finance as we know it has largely been centralized and it has been controlled by authorities like governments, reserve banks, and retail banks. While it provides all the essential utilities, it is plagued with a lot of intermediaries that cost a lot in terms of both time and money. There have been instances where international money transfers take even weeks to get reflected in the recipient’s bank account.
The reach of traditional finance is limited to the presence of financial institutions that are a part of the ecosystem. Therefore, even if a person or a business needs money in a place where banks do not exist, it might not be possible for anyone to come to the rescue.
Decentralized finance or DeFi as it is commonly abbreviated aims to do away with all the disadvantages associated with traditional finance. It can create a system that exists outside centralization and censorship. The process is made possible through a network of interacting applications called decentralized apps or d’Apps in short. DeFi is so expected to replace the traditional system of finance and has already conceptualized providing a lot of services that the existing financial ecosystem already provides.
To govern these activities, there are different DeFi protocols that exist. One of the most prominent DeFi protocols is the Uniswap protocol.
What is Uniswap?
Uniswap is one of the most popular DeFi protocols built on top of the Ethereum blockchain and is designed for swapping ERC20 tokens without necessitating buyers and sellers for creating demand. Uniswap uses an equation to set the value of an asset and it helps in setting the magnitude of demand.
Perhaps the biggest indicator of the success of Uniswap is their automated liquidity it provides to the blockchain, enabling easier transactions. It is also open source and that makes the Uniswap protocol available for anyone. The transparency also ensures that any person can check the protocol, the transactions, and all the aspects of Uniswap as and when they need it.
Uniswap was invented by Hayden Adams in 2018 and just after a year since its inception, Uniswap made $22 million in trade volume and $26 million in pooling value. This makes Uniswap the most desirable protocol in the DeFi world.
What makes Uniswap special?
The success of Uniswap can largely be attributed to the distinct features it brings to the blockchain table.
- Unlike other DeFi protocols, Uniswap uses a unique pricing mechanism called the constant product market maker. It is quite similar to the automated market maker model.
- One of the major problems that every decentralized cryptocurrency exchange faces even today is the lack of liquidity. With a protocol like Uniswap, this challenge is effectively solved by introducing liquidity pools. These liquidity pools are a repository of tokens guarded by a smart contract and they take care to ensure that some fund is available for all transactions.
- The automated market makers and the liquidity pool come to the forefront in effecting quick transactions enabled by an automatic smart contract. The smart contract helps in swapping tokens without any delay or complicated listing process. The fee for the swapping process is also kept to a minimum and at most times, it is zero.
- The Uniswap protocol uses an equation instead of order books. The price of the assets, the trade of tokens, the swapping, and every transaction that happens within the protocol is carried out by the equation. Since order books are subtle representations of centralization, Uniswap does away with those, keeping the entire network around the protocol truly decentralized and resistive to censorship.
The Uniswap protocol has proved to the world that the centralization for the world of finance is practical and it is closer to being a reality than ever before!
How does Uniswap work?
The way Uniswap works is simple and straightforward. The epicentre of all the operations on the Uniswap protocol is the liquidity pool. People who contribute tokens to this pool are called liquidity providers and they can earn a profit from the interest paid by borrowers on the borrowed tokens.
Any person can create a market by depositing just an equivalent value of two tokens. The tokens can either be ETH or any other ERC20 token. When another user borrows from this liquidity pool, the liquidity providers can redeem their tokens for direct earnings. This method of earning from a DeFi protocol is called yield farming.
The market for a protocol like Uniswap
The success and the rapid growth of Uniswap have proved to the world that a DeFi protocol is relevant and is here to stay. This has prompted a lot of entrepreneurs to consider creating their own DeFi protocol like Uniswap.
If you are one of those, you will need to consider a few aspects that made Uniswap successful in the first place.
Qualities of all protocol like Uniswap
- Your DeFi protocol should be easily accessible through its intuitive front-end.
- The swapping mechanism needs to be simple and straightforward and should be made possible through cryptocurrency wallets.
- Your DeFi protocol like Uniswap should be flexible enough to accommodate a wide variety of tokens.
- Needless to say, your protocol should be completely permissionless and should be able to handle transactions with considerable speed.
- The protocol, just like the blockchain it rests on, should be immutable.
- Smart contracts should take the place of automated market makers, ensuring a high magnitude of liquidity.
- The protocol should present a lucrative option to the investors. They should be able to earn a passive income from the protocol just like Uniswap has yield farming.
Conclusion
We have seen the relevance and features of a DeFi protocol like Uniswap. Instead of engaging in a cumbersome process of building a Uniswap like DEX development, you can go for a white label clone of Uniswap.
With a white label clone, building a decentralized exchange like Uniswap becomes simple and easy. A white label solution will also ensure that the product does not have any bugs or glitches. In a matter of days, the crypto entrepreneur in you will be able to launch your own DeFi protocol like Uniswap while still saving up on money. All you need to do is get in touch with the company that specializes in the development and creation of white-label clones of protocols like Uniswap.
